As retailers start to report their results from Christmas 2023, at Savvy, we have been reflecting on the year that has just passed, but more importantly thinking about the year ahead and what the most significant likely impacts will be on consumers and retail businesses.
Improving consumer confidence
Easing inflation will provide a further and much welcome boost to the increases in consumer confidence that we have seen in recent months.
Especially in food, drink and grocery retail lower inflation is set to make trading considerably easier, reinvigorating volume growth and opening the door for brands to refocus their attention and investment on driving brand equity and quality credentials. In 2024 FMCG brands will need to reassert their differences from own label as they try to win back lapsed shoppers and justify their pricing.
The cost of living crisis has battered many household brands. Own-label products have taken considerable share from established branded players in recent years as shoppers have sought quick and easy ways to keep grocery budgets under control. Many brands have suffered from under investment in marketing.
2024 is a time for FMCG brands to reset and rebuild, not for short term market share gains, but to put themselves on a solid footing to compete and grow for the next 5-10 years. While traditional promotions and retailer media have a role to play, we suggest brands need to act much smarter if they want to win in the longer term. This should be done by creating meaningful connections with younger consumers through data that brands create themselves not data owned and controlled by the retailer.
Difficult times for the hospitality sector
While the outlook for food retailers looks better in 2024, we don’t think it will be so rosy for the hospitality sector with pubs, bars and restaurants facing a tougher time. Shoppers continue to prioritise at-home eating occasions, epitomised by the rise of the fake-away, and any additional disposable income looks likely to be diverted into holiday funds, rather than eating and drinking out more often. We think that the value hospitality sector will still win with the on-the-go consumer, but occasion hospitality will find it tough with the challenges of increased costs in labour and property.
Non-food retailers face new competitive challenges
After a sluggish start to the peak selling season there was room for some optimism in November as sales and footfall saw upwards movement. There are star performers in the market, most notably we expect a strong performance from M&S and Next – the latter reporting today that it beat its own guidance, with full price sales up 5.7% year-on-year during the nine weeks to 30 December.
However, clothing retailers in particular have had a very tough festive season and, with a shopper focus on sustainability, its more than likely 2024 is going to be a year of ‘less stuff’ being purchased. We do note however that shoppers are using brands like Shein, Temu and Ebay as a way of stretching their spending. Savvy’s recent research revealed that, in the 3 months to November 2023, 16% of shoppers bought from Temu and 15% from Shein. This increases to 21% and 24% respectively among 18-34 year olds. Both are expected to gain share in 2024 and incumbent retailers would be well advised to take notice of their rapid growth and innovative business models.
Tentative improvement of High Street trading conditions
We have seen a return to High Streets big and small this Christmas and not just for retail. Shoppers have been looking for things to do and places to visit. This year Christmas markets came back with a bang. Events as varied as ice skating in town centres to illuminations and animations got families back right in the heart of towns and cities. This has enabled growth of independent and pop-up retailers delivering to shoppers more locally relevant product, which we know they were looking for. We expect the trend of shopping in person to continue in 2024 particularly among younger shoppers which should provide comfort to town centre managers, shopping centres and BIDs around the country. Indeed, in Savvy’s research we find that younger shoppers are more optimistic than their older counterparts about the prospects of the High Street. The research also highlighted that 18-34 year olds want to see and shop with more local businesses (mentioned by 76%) and increased availability of sustainable products (78%).
We still believe much High Street success will be concentrated into major centres and specific geographies where there is either affluence or a reason to visit, like a historic place.
Challenging economic outlook but some reasons for optimism for shoppers
The economic outlook for 2024 remains uncertain. The geo-political situation is unstable with the Israel-Gaza and Ukraine wars battling on. Attacks on ships in the Red Sea are disrupting supply chains (as referred to by Next today) leading to higher shipping costs. Closer to home, high interest rates continue to test the finances of many indebted households, especially those with large mortgages, and the cost of living crisis has left many struggling to make ends meet. While by no means guaranteed, the threats of a recession and rising unemployment in the UK economy are real.
On the positive side we have started to see the rate of inflation steeply decline. The prices of petrol and diesel have fallen significantly, and lower food commodity prices are starting to percolate through to consumer prices. As we start 2024 a supermarket price war is getting underway. In many food and drinks categories it is likely that prices will fall this year.