Faltering consumer confidence and macro uncertainties will hit retail sales in 2016

Faltering consumer confidence and macro uncertainties will hit retail sales in 2016

Faltering consumer confidence and macro uncertainties such as potential interest rate rises and concerns over the EU referendum are likely to affect UK retail sales growth this year as consumers look to other sectors to spend their cash. Retailers will need to stay on their toes and think smart, one think tank suggests, if they are to reap success in 2016.

The KPMG/Ipsos Retail Think Tank (RTT) has warned that retail sales growth is unlikely to improve this year, despite consumers having more money in their pockets, and is set to edge back from around 1.8% to around 1.7%. 

"With wages finally responding to the tightness in the labour market and spending power further boosted by the plunge in energy costs, consumer fundamentals are looking in excellent shape right now," explains James Knightley, senior UK economist at financial services group ING.

Despite this, however, the RTT highlights that the way people are shopping has fundamentally changed and that while consumers' disposable income is up, this isn't reaching the retail tills.

The early repayment of mortgages and paying tradesmen to upgrade properties are absorbing a higher percentage of consumer spend and will continue to do so in the coming year, the think tank warns. And macro uncertainties in 2016 are likely to exacerbate this further, thanks to uncertainty over the wake of the EU-referendum and the potential interest rates rise.

Knightley adds: "With domestic demand looking strong and last year's plunge in the oil price dropping out of the annual CPI calculation, headline inflation is likely to rise fairly swiftly through early 2016. Both these factors are likely to make consumers and retailers somewhat jittery about the future."

An added complication for retailers this year will be the implementation of the National Living Wage before April, which will result in a significant overnight increase to the cost base. This, the RTT says, will have a knock-on impact on pay differentials, staff discounts, and pensions. 

The majority of retailers, it suggests, will need to examine how productivity can be improved through more efficient use of resources or technology solutions.

Riding the wave

In order to best ride the wave of complications and uncertainties in the year ahead, the RTT suggests retailers adapt their business models and find new ways to better serve customers, such as delivering a seamless multi-channel experience, and investing in technological innovation. 

"Not every self-service checkout is welcome, but the use of technology to enhance the experience and eliminate friction in the customer journey is increasing and I'd expect to see further innovations in 2016," explains David McCorquodale, UK head of retail for KPMG. 

Stripping out complexity, making shopping easier and quicker, and adding intelligence to make the experience more personal and rewarding will be key. 

"Bringing intelligence of current customer behaviour to the heart of the business, making big data effective to deliver on-demand service through retail analytics will be instrumental in making retailers more agile and responsive," adds Dr Tim Denison, director of retail intelligence at Ipsos Retail Performance.

Retailers will also need to wean consumers off a diet of discounts, the think tank says. Where once promotions were used as a reaction to a slowdown in sales, or the need to clear stock, the RTT highlights that while shoppers will remain hooked on discounts, they are now planning their spend in advance and shopping around for the best deals. Retailers therefore need new strategies and customer propositions that save consumers money, and at the same time, generate incremental demand.

"Promotions will have to be multi-channel, which brings with it the risk of adding to supply chain costs but more importantly, strategies need to be technology driven, where 'big data' is key to making the crucial supply and margin decisions," explains Mike Watkins, head of retailer and business insight at Nielsen UK.

Another opportunity for UK retailers will be cross-border e-commerce. According to Paypal, 86.4m overseas shoppers from 29 countries surveyed bought online from the UK in the last year. So even those without a physical presence overseas can bolster domestic demand by opening their online store globally and developing a localised online presence for markets that warrant the investment.

Outlook for 2016

An increase in spend and spending power by UK consumers provides much to be positive about going into 2016, but the RTT questions just how much retail will benefit from this. 

"While 2016 is likely to be a much more positive year in growth terms, not all retailers and sectors will benefit," explains Conlumino's Maureen Hinton. "An improving economy will not solve the problems of how to deal with the fundamental changes in how consumers shop, and the rising costs of meeting their expectations."

Dr Tim Denison believes 2016 will be "a tricky year" to get the balance right between cost control and investment. As shoppers adapt, and millennials become the majority, so too must retailer, he says.

"Retailers will need to keep on their toes. Success will not necessarily come from running quicker. At times it may come from running in a different direction. Retailers would be well advised to look outside the sector, not just inside, for inspiration and guidance." 

Richard Lowe, head of london, Barclays Corporate Banking, offers a similar view: "Despite the challenges we are likely to face over the next 12 months, if retailers are able to recognise what needs to be done as early as possible they can still have a very successful year. I'm confident that the industry has what it takes to deliver a strong result in 2016."