Retailers will be glad to see the back of 2022 after a tough 12 months for the sector.
War in Ukraine, soaring inflation and a cost-of-living crisis have all contributed to warnings from Next, Marks and Spencer and ASOS.
Aside from the profits hit, macro conditions are causing a shift in consumer habits with people ‘downtrading’.
Here are some of the trends predicted to dominate retail in 20233.
Online players to feel the squeeze
Purely online players experienced an unprecedented boom during the pandemic.
However, e-commerce sales have dipped from those highs with ASOS and Boohoo struggling to deal with supply-chain issues, a high level of customer returns and a macroeconomic backdrop.
Pent-up demand from the lockdowns has also seen shoppers heading back for a bricks-and-mortar experience.
This means that stores that offer a hybrid mix should be better placed to navigate 2023 compared to online-only vendors.
“Checking out the latest styles in store before buying at tills, or later online, is now the trend of the moment, so those retailers who were already plugged into multi-channel offerings are showing much more resilience,” said Susannah Streeter, a senior investment and markets analyst at Hargreaves Lansdown.
Primark, known for its solely store-based experienced even during the pandemic, should be one of the beneficiaries and has started its base-level online service.
Owned by Associated British Foods, Primark now offers click-and-collect services in selected areas across the country, which is expected to roll out nationwide should the trial be successful.
For brick-and-mortar players, building an online presence is relatively cheap and easy.
Although for purely online players such as ASOS and Boohoo, the reverse is a different story, often more expensive to do so and even harder to get off the ground.
Sustainable fashion to boom
Research from Thredup, the world’s largest online thrift store, shows the second-hand apparel market is expected to grow 127% by 2026, three times faster than the overall market.
Second-hand clothing tends to be cheaper, more environmentally friendly and in recent times, also much more fashionable among millennials and Gen-Z.
“Vintage purchases are becoming more fashionable as our more cautious habits collide with the desire to be kinder to the planet and re-use and re-cycle more,” Streeter added.
“The rise of a more environmentally friendly fashionista is a headwind whipping up around fast fashion,” she says and a noughties trend out of kilter in the 2020s.
“Piling baskets high with disposable styles seen on the catwalks just weeks earlier is falling out of favour and more pre-loved garments are now topping wish lists.”
Retailers throughout 2022 have found ways to dip their toes into the second-hand market, most noticeably Zara, which now offers customers the chance to return unwanted items for resell, repair or donation, a trend which is likely to continue growing into the new year.
Shift away from the high-street
Increasingly, retailers have been ditching the high-street and department stores for outlets in retail parks.
In an investor presentation, M&S highlighted how switching from its Mostyn Street location to a retail park in Llandudno, Wales, resulted in greater clothing and home (C&H) sales and food sales, up 35% and 75% respectively for that region.
Research from the Local Data Company also showed that Next and TK Maxx feature prominently at retail parks with 194 (almost 40% of its total stores) and 178 locations respectively.
Retail parks offer cheaper running costs, a necessity in the current economic situation, and more space.
Transport links around retail parks also usually mean they can double up as local distribution hubs for deliveries.
A shift in ‘what the high street is’ as a result of the pandemic has also forced the hand of store groups.
Town centres and high streets are now viewed increasingly as social and living spaces as opposed to shopping hubs.
A survey by Ordnance, which provides maps and geospatial data, showed that between March 2020 and March 2022, there was a decrease of 9,300 retail stores in towns and high streets.
The space left behind was filled by 350 tattoo studios, 700 pubs, 2,000 cafes and 4,600 fast food outlets.
“This style of development is expected to be part of the blueprint for the high street’s future,” said Streeter.
Recession, recession, recession!
Trends in the sector will clearly favour some more than others.
For example, the move away from online shopping will benefit those with a multi-channel offering.
However, a recession will be challenging for all regardless of shifts in consumer behaviour.
The Office for Budget Responsibility (OBR) believes the UK economy will shrink by 1.4% in 2023, while a recession will cause an overall 2% drop in GDP.
According to Chris Beauchamp, chief market analyst at IG Group, retail recovery in 2023 is “all down to the recession.”
“Retail won’t escape the carnage if 2023 is when a hard landing arrives for the UK and global economy.
“Consumer spending could nosedive, and even a drop in inflation will be of limited help.”
Russell Pointon, director of consumer at Edison Group suggests that data points “to a very bleak outlook for consumer spending, with forecast declines in real household disposable incomes of over 7% from 2021/22 to 2023/24.”
“The pressure on disposable incomes have and will continue to force consumers to make real and hard choices on how to spend their money.”
Much of this further bleak outlook, however, has already been discounted into the share price of companies.
Next has fallen 30% so far this year, with JD Sports at 44% and ASOS at 77%.
However, Beauchamp believes that into 2024, the picture starts to look better, while the OBR expects inflation to moderate throughout the year.
“While there is likely to be a high level of volatility in the share prices in the coming months as they react to both positive and negative news flows from the companies and their competitors, there is good potential to make strong gains as the outlook becomes ‘less bad’ given the low share prices and expectations,” said Pointon.
“Valuations may start to look tempting and the more commentary there is about retail being in trouble, or even uninvestable, then the more interesting the sector may become from a portfolio point of view,” said Russ Mould, an investment director at AJ Bell.