Retail outlook for Christmas and 2025
- Budget changes bring benefits and challenges.
- Expansion and investment in city centres and retail parks.
- Delivering better experiences for shopping ‘day out’.
- Entertainment integrated into the retail mix.
- An acceleration of automation and use of AI in supply chains
- Reinvention of the department store and food hall.
- Challenges remain for online only stores.
- Prospects for M&S, Card Factory, Greggs, Next, Curry’s, Games Workshop and Boohoo.
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “Savvy shoppers kept their powder dry before the big festive promotions kicked in, and the signs are that more cheer could be on the way for retailers in terms of spending in the weeks and months to come. With the Budget done and dusted, more interest rate cuts eyed on the horizon, and an increase in the minimum wage coming in, consumers are that bit more confident about their personal finances. As people show signs of loosening their purse strings, retailers will have to be nimble amid the competition to lure in the spend through 2025.
Entertainment crucial in the retail mix
Staying ahead of the big emerging trends is crucial. These include the resurgence in the popularity of shopping in city centres and retail parks, the desire for a higher-end shopping experience, and the increasing importance of entertainment in key retail venues. Although Greggs has won shoppers’ hearts for a quick, cheap and easy bite to eat, shoppers are seeking more desirable hangout spaces, leading to gastronomy and leisure becoming an integral part of the day out in town. The shift from buying goods to purchasing services is showing little sign of abating and instead appears here to stay. Despite fears streaming would be the antihero out to defeat the traditional movie theatre, there was a 22.8% surge in cinema spend in November according to Barclaycard. Successful city centre retail hubs will integrate not just dining but entertainment – from karaoke clubs to crazy golf joints – to provide a seamless day to night experience. At a time when payroll costs will be rising for many retailers, due to the increase in employers’ National Insurance contributions, it’s doubly important to get the investment recipe right, when it comes to expanding footprint and upgrading stores.
Wage costs look set to accelerate automation
The increase in National Insurance contributions will be particularly onerous for the industry, given that the big retailers employ such large numbers of staff, in entry level and part-time roles. The higher costs will also come into play just as companies are also dealing with the new packaging levies. It’s not yet clear what mitigating strategy companies will take. Although some costs may be passed on in terms of higher prices, given the hugely competitive nature of the industry, it’s likely that lower pay rises or a reduction in headcount will be looked at instead. It seems clear that an acceleration in automation to find efficiencies to offset higher costs will be a course of action many retailers will pursue. A fresh proliferation of cashier less tills is likely, in convenience orientated shops, although higher-end stores will still invest in personalised service. The use of robots and AI technology in fulfilment and inventory management is a set to become an even bigger trend, with the use of algorithms helping companies maintain more accurate stock levels by forecasting demand more accurately. The scatter gun style of filling stores with huge ranges to cater for the masses is set to make way for a laser focus approach, tightening product selection to target specific customer demographics and trends.
Department stores and food halls reborn
Some traditional formats, which looked like becoming relics of a bygone era, are being rejuvenated ready for a new era of shopping as a pastime. The department store has not yet had its day. The flight to prime retail space is continuing, with a focus on fewer but larger stores with highly curated ranges. Marks and Spencer is investing £21 million in a three-floor 80,000 square foot venue in Bristol, which is set to open in the Autumn, selling food, clothes and beauty.
The food court concept, which had its heyday in the ‘80s is also being reborn. Food Halls are surging in popularity, showcasing local eateries and food vendors and high end groceries under one roof. According to real estate company Cushman and Wakefield, the number of food halls across Europe has almost doubled, with the UK one of the economies leading the charge. Just like the food courts of the past, you can pick and mix from vendors, but then eat together, but this time around the menus a little more adventurous in their culinary ambitions.
Optimism, but challenges remain for online only stores
There is optimism on the horizon, despite the challenges the Budget has brought. The past five years has been like a survival of the fittest experiment, given the struggle of operating through the pandemic and then the cost-of-living crisis. Operating models have become much more flexible, but retailers still can’t be complacent and inevitably some will fall by the way. Online-only retailers who have stood still as demand has accelerated for in-store experiences are going to find it even harder going, especially given the competitive might of mega players like Shein, which looks set to gain legitimacy with a London-listing expected early next year.
Prospects for listed companies in the sector
Marks and Spencer
Marks and Spencer has been making remarkable progress with its ranges, which have tickled the fancy of shoppers, leading to some impressive revenue growth. Its core customers have been more insulated from cost-of-living headwinds, but they’ll still have an eye on trimming costs. Clothing and Home has made some impressive strides and sales growth reflects improved customer perceptions of value, quality, and style. What is particularly impressive is that over 80% of M&S’s clothing has sold at full price – which is much higher than most of its rivals. Profitability dipped slightly in the first half – due to investment in digital platforms but this is positioning the company more resilient for future growth. Operational changes are also helping M&S save on costs, which means they can keep food prices competitive, attracting more families. M&S offers highly curated, pared down ranges, compared to the Aladdin’s cave of a Waitrose store but it also has a sharper focus on offering value, for example through numerous multi-buy deals. M&S has given shareholders plenty to be happy about this year, growing market share and margins while implementing a significant cost-cutting programme. Operational and strategic improvements and enhanced cash generation means the business is now in much ruder health.
Card Factory
Card Factory specialises in greeting cards and gifts and has more than 1,000 stores across the UK and Ireland. It also sells personalised cards online. By making most of their cards in-house, Card Factory can offer high-quality products at lower prices. It’s recently expanded its product range and although profits fell in the half-year results, it didn’t change its full year guidance, indicating it’s expecting a surge in sales during the crucial golden quarter. Management is confident that Christmas will deliver, partly because of its value proposition, in a competitive market. Average cards sell for just £1.21, well below many competitors, putting the company in a leadership position on price. In the UK, Card Factory has less than a 4% share of the £13.4bn market so there’s room to grow locally but the bigger expansion story lies internationally and it’s exploring promising markets like the US. The key risks are the competition, especially online but given the consumer snap back to bricks and mortar stores, its business model offers resilience.
Greggs
Greggs is now a real staple in town centres and retail parks across the country, with an improved reputation to boot and little hint of flaky sales in sight. The prospect of more money in the pockets of consumers, as borrowing costs come down and the minimum wage goes up, could help boost sales further. The presence at retail parks allows the chain to capture footfall opportunities which are leaning towards these more convenient locations. Increasing outlets at travel destinations like train stations and motorway services is also a clever move and helps lower dependence on the more volatile retail sector. The traditional spots on high streets are also benefiting from a return to hybrid and office working. A revamped and improved menu, together with refreshed stores and growing delivery options all mean it’s able to sate hungry appetites for its products. There have been concerns that Budget changes might for the company to put up prices, but management say they won’t change its rapid expansion plans and customer price rises are likely to be in pennies not pounds.
Next
Next posted yet another super-strong quarter with favourable weather conditions driving consumers to update their winter wardrobe, helping deliver better-than-expected full-price sales. Fashion fans may be fickle but Next has its finger on the pulse, delivering what style-conscious consumers want at the right price point, with its slick omnichannel operations firing on all cylinders. 90% of its overseas business comes from Europe and the Middle East, both of which can be serviced quickly and cheaply from the UK. Given the untapped size of these markets, and increased traction in new markets, there’s a big opportunity if Next can execute its expansion plans well. In the UK, its more focussed on out-of-town retail outlets that have been particularly resilient even as retail sales have waxed and waned over the year. The group has added insulation in that its shops typically have shorter, more favourable leases than peers which gives it extra flexibility. But its impressive performance in recent years hasn’t gone unnoticed by the market and that increases the pressure to deliver growth
Curry’s
Curry’s has sparked optimism by making positive progress as market headwinds ease off and consumers have shown less caution in their spending patterns. At the last update there were market share gains in all major markets which provided cheer for investors. There is also hope that the integration of artificial intelligence into electronics will persuade more people to upgrade kit and invest in the latest models. The group’s growing services channels, like care and repair, offer a higher margin than goods sales and also help with customer retention. Phone purchases have been a bright spot, and its ID Mobile contracts service is going strength to strength, boasting more than 1.6million subscribers. But TVs and computing equipment have been a harder sell, as bigger ticket items prove tricky to shift. While consumer confidence has picked up lately, much still hinges on the vital festive trading season. The Nordics region has dragging on the group’s performance. Here, market weakness is persisting but on the bright side Currys is winning market share.
Games Workshop
Games Workshop has turned what on the face of it is a niche hobby into an international fantasy powerhouse. It is a one stop shop when it comes to tabletop miniature gaming and its prowess at the full sweep of production design, manufacturing, distribution and retail has made it a global leader. This means that it doesn’t have to rely on third parties to develop create and sell its products, helping keep margins higher. In terms of market share, no rival comes close. The science fiction and fantasy market is huge and Games Workshop keeps fans entertained every step of the way, drawing in collectors of miniature to paint their own models to play at home or at big events. This huge store network around the world, enables it to recruit new players and customers from an early age. Spin offs including books, magazines and online content helps with maintaining recurrent revenue. Its top hit Warhammer 40,000 has had a big year, with the 10th edition launched which drove record revenue, helped by its video game licensing. This push into licensing is a big part of the company’s future growth strategy, with potential forged with Amazon to develop the game into films or series. This has all helped Warhammer cement a strong financial position, with a deep well of accessible cash offering the company significant flexibility. However, one key risk is the cyclical nature of the product releases and there’s also licensing unpredictability to take into account.
Boohoo
Key customer metrics and profits have been trending in the wrong direction at Boohoo and, although there is a plan in place aimed at turning things around, big challenges lie ahead in 2025. The situation has prompted major shareholder Mike’s Ashley’s Frasers Group to try and gain two board seats at the company. Boohoo’s board has already rebuffed attempts to install Mike Ashley as CEO. They are instead counting on Dan Finley, with his successful track record at Boohoo’s Debenhams online business, to turn the company’s fortunes around. As the new CEO, Dan Finley will have his have his work cut out, given that group revenue and profits both fell at double-digit rates in the first half. It’s going to be a tough road ahead, given how competitive the retail space is right now, particularly with the might of Shein and Temu disrupting the online fashion space. One of his first task’s will be masterminding the restructure of the business, which might include spinning off one or more of its core divisions. But it might be more worthwhile finding new ways of revitalising its young fashion brands such as PrettyLittleThing, as improvements here would be far more likely to move the dial.’’
