Update on the retail sector

Retail sales have fallen by more than expected in Q1 2022 amid weakening demand and soaring inflation. For the first quarter the ONS reported that retail sales volumes were down by -1.1% while retail sales values increased by 0.8% compared with Q4 2021. The rising cost of living is posing a threat for the retail sector as people have no choice but to cut back on how much and what they buy. Our data shows that of those spending less, one in two consumers (54%) is buying fewer goods or services in a conscious effort to save money. Of the same consumers, a third (35%) are also choosing cheaper brands or stores and a quarter (25%) are taking advantage of sales or discounts. Retailers are also faced with greater competition from a resurgence in tourism, eating out, live sport and music events.

Higher inflation is not only reducing consumer demand, it is also increasing business costs including those associated with labour shortages and rising input costs. To counter those costs, retailers need to look for savings elsewhere including reducing operating costs and scaling automation across their organisations. Recently, some supermarkets have been opening more self-service checkouts, cutting back on 24-hour opening hours and reducing the need for cash handling. Retailers, like manufacturers, have also started to increase their prices which has already led to some falls in sales volume, a sign that consumers could be either opting for cheaper brands or simply buying less. However, the sector has also benefited from some savings made from the reduction in costs related to COVID-19.

The ONS retail sales data showed that online sales slipped 6% in March compared with the previous month as the channel has been particularly hard hit by households cutting back on discretionary spending. As a result, the share of online sales as a proportion of total retail sales fell in March (to 26%) from its peak in February 2021 (37%), although it still remains six percentage points higher than in February 2020. As retailers adjust to a post-COVID world, a question remains whether they need to scale back some of the large investments made in their online channels during the coronavirus pandemic and this to avoid being left with too much excess capacity.

According to the Tracker, on average 35% of consumers made their last purchase online across all non-food categories in Q1 2022. This represents a five-percentage point fall compared with Q4 2021 but remains higher than in the pre-COVID Q1 2020 period (31%). The data has also revealed which categories were most likely to retain the gains made during the pandemic. For example, categories mainly purchased online such as events, travel or digital services saw little change. However, online sales of categories such as clothing and footwear, and beauty and personal care, experienced a sharp contraction compared with the same period a year ago, and this despite some of that fall being attributed to inflation pushing people to cut back in those non-essential categories. This could undermine the premise that the pandemic has permanently shifted consumer buying habits towards online.

According to the ONS, food sales volumes were down 2.8% in Q1 2022 and have fallen every quarter since Q2 2021. While this is in part because people are eating less at home as offices and restaurants reopened, it also points to the impact of rising food prices on the cost of living. Grocery prices rose 5.9% in the three months to 17 April compared with the same period a year earlier, the highest level since December 2011. In a sign of hard-pressed consumers starting to switch brands to ease pressures on their household budgets, our data shows that discounters increased their market share in Q1 2022. Our research also shows that the number of people using online for their main grocery shop fell for the second consecutive quarter but remains five percentage points higher than the same period two years ago. With consumers returning to spending in the hospitality sector grocery retailers will need to work harder to retain the gains made in their online channels.