Six reasons behind the declining retail market in the UK
2023 has proved a difficult year for businesses across the UK with the retail sector in particular struggling to find it’s footing between tradition and transformation. This struggle has been brought into the spotlight with the recent collapse of budget retail giant Wilko, who entered into administration on 10th August, 2023, with 400 stores and 12,000 jobs currently at risk of disappearing from the market.
Footfall on high streets has been steadily declining and continued poor returns have forced retailers to slash prices in an effort to drum up business.
Though the failing retail market is a symptom of larger economic unrest in the UK, there are a number of factors specific to retail that have had an effect on consumer spending habits.
The Impact of COVID-19:
The COVID-19 pandemic introduced a huge shift in the way consumers engage with retail or online shopping. Though online spending was steadily rising prior to 2020, during lockdown online shopping soared as retail stores closed and people were unable to leave their homes. Between February and June of 2020, online sales rose from 30% to 42% of total retail sales in the UK. Post lockdown this has accelerated the adoption of online shopping, seeing further market share taken from the retail market.
While we are now over three years out from the pandemic, the lasting effect of lockdown has left a continued impact on consumer preferences, with a blend of online and offline shopping becoming the new norm, leading to online spending being higher than pre-covid levels by December 2022.
Energy crisis and operating costs
Following the pandemic, the demand for energy and gas grew exponentially as businesses began to reopen and the market returned. This quickly created a supply issue that saw energy prices skyrocket and created a cost-of-living crisis in the UK.
While this issue was felt throughout the country, with a continually rising price cap making winter 2022 a difficult time for many, this issue was ten-fold for businesses where energy prices were uncapped.
Many businesses were unable to accommodate these operational cost rises and as a result many businesses had to cease operation. In 2022, over half a million UK businesses dissolved and early 2023 figures saw more than “105,000 UK business close in the first quarter alone” as sited in a City Monitor report.
Rising inflation and cost of consumer goods
Supply and demand issues would see rapid inflation in the price of consumer goods in the UK. With a mix of supply chain issues due to labour shortages and high demand following the pandemic, this issue was compounded by the war in Ukraine and hold over issues from Brexit.
This resulted in the current period of rapid inflation with rates to their highest in over 30 years, hitting a peak of over 10% last year.
While inflation has begun to decrease, with the current rate at 6.8% (August, 2023), it is still far from the Bank of England’s target of 2% by the first quarter of 2024.
Changes to the base rate
In an effort to curb inflation, the Bank of England has been steadily increasing the base rate of interest to discourage spending and incentivise people to save. With current rates at 5.25% (up from 0.1% in November 2021), the current rate is the highest since the financial crash of 2008.
The Bank of England raises the base rate when inflation is high to dissuade people from further spending, with the end goal being that as people opt to save rather than spend, overall demand will decrease, and inflation will follow.
This is a further reason for the recent decline in retail sales in July (alongside poor weather) that has seen retail stores struggle to drum up business or entice stretched budgets into spending.
Elsewhere, a further concern for UK shoppers is the increase in ‘shrinkflation’ taking place with products across the market. Shrinkflation is the process of items getting either smaller or reducing in quality without any change to price. In a recent study by Barclays, it was found that four-fifths (81%) of consumers are worried about shrinkflation.
70% of consumers reported that they had noticed examples of shrinkflation with 29% stating that they would be buying their favourite product less as a result. The same study also found that discount store spending was up 8.8%, implying that many are being priced out of their usual products due to these practices.
This has led to all-time lows in consumer confidence, with scores in late 2022 reaching record lows for consumers optimism and trust in their retailers and commerce providers. In September 2022, scores reached -49, amidst the on-going cost of living crisis and Liz Truss’ disastrous mini-budget. Though that number has risen throughout the year, gradually returning to -25 as of August 2023, these scores are still far below pre-covid levels.
With the previous issues facing retail stores due to the residual issues of lockdown and covid-19, losing consumer trust has been the real compounding issue in diminishing returns for retail markets. In a time where re-establishing consumers back into the market is essential, the retail market has been unable to maintain these relationships, and this has led to many returning to new habits acquired during lockdown and a greater reliance on online retailers.
Our verdict on the retail market
The UK retail market has become yet another casualty of the current financial crisis taking place in the UK. In the aftermath of the COVID-19 pandemic, events like the Wilko collapse show that the retail market has yet to fully adapt in this new economic market. This has highlighted the further need for adaptability and innovation. Retailers that can more successfully integrate digital solutions, regain customer trust, and embrace more consumer conscious strategies will have a better time weathering the current economic turn. This is why Wilko competitors such as B&M have been able to thrive and announce new store openings when their competition is entering administration, as they emphasise affordability and value for money. In a market where traditional norms are being reshaped by digital disruption and changing consumer behaviours, retail stores need to adapt new offerings to keep themselves competitive in the new emerging market.