How is the retail sector faring ahead of the 2024 holiday season?

Household finances have been stretched in recent years, with some families affected far more than others. In the lead-up to Christmas – a crucial time for many businesses – retailers will be looking to translate consumer interest into hard sales, particularly as the outlook for 2025 is so uncertain.

Each year, the ‘golden quarter’ of October to December produces a surge in retail sales and, for some retailers at least, an accompanying boost to their profits. As highlighted in a previous contribution to the Economics Observatory, this is a critical operational period for the sector.

Every year at this point, there is both excitement and tension among retailers about consumer sentiment and behaviour, especially as many order and stock decisions would have been made months ago.

Businesses will be nervous about whether they can translate consumer interest into hard sales. This will be especially the case if consumer sentiment has weakened and perceptions of economic news have worsened since retailers made their plans for Christmas.

This is particularly the case this year, as the prospects for the economy under the new government has occupied much attention since July. The focus on the budget and its measures in late October have affected both consumers and retailers, despite the fact that implementation of many of the announced policies remains months away.

Will this dampen Christmas spirits and result in a large hangover for retailers to worry about in 2025?

What have the last few Christmases been like?

The last four Christmases have all occurred under a cloud, albeit of different forms. The Covid-19 pandemic brought about a lockdown Christmas in 2020, something that recurred to a large extent in 2021 as the Omicron variant of the coronavirus moved through the country.

As the pandemic became more manageable, the Russian invasion of Ukraine in February 2022 triggered an energy crisis, which became a full-blown cost of living and ‘cost of doing business’ crisis.

The UK – which was exposed by national energy policies, reliance on long supply chains and the continued implications of Brexit – suffered more than most. Christmas 2022 saw major difficulties driven by costs for consumers and retailers.

Some of this ameliorated slightly in 2023 as the cost of living crisis eased, but the Gaza conflict added to worries.

Within this broad picture, some groups of consumers and some retailers have done well. Retailers with a strong brand and online presence, as well as those with a focus on local and convenience in 2020/21 saw major gains. Discounters and retail firms with a strong price focus performed exceptionally well in the cost of living crisis.

Whatever the macro view of whether it will be a good or bad Christmas, some retailers will do better than others. This is always the case and will be so again this year.

What has 2024 been like for consumers and retailers?

The cost of living crisis and high inflation were the focus in 2023. Large and rapid increases in energy and other costs fed into higher consumer prices, producing an affordability gap since 2022.

Retailers saw the volume of sales decrease but their value increase as consumers altered their shopping patterns, behaviours and consumption. Strikes and pay disputes became widespread as workers sought to increase take-home pay to enable them to afford to ‘heat and eat’. The Bank of England sought to dampen down inflation by raising interest rates, but that also hit consumer confidence and increased mortgage costs for some.

All of these pressures have reduced during 2024, although macro concerns remain. Geopolitics, climate change and its effect on supply chains, high energy costs and an unprecedented retail crime wave in 2024 make this a worrying time for retailers and some consumers.

But throughout 2023 and 2024, as some of the price reduction measures took effect, inflation dropped sharply (see Figure 1). As inflation began to fall, the ability of the Bank of England to lower interest rates grew, leading to stability and then small reductions in 2024 and optimism for further cuts in 2025 (see Figure 2).

Figure 1: Annual inflation rates (consumer prices index including owner occupiers’ housing costs, CPIH; owner occupiers’ housing costs component, OOH; consumer prices index, CPI; 2014-24

Source: Office for National Statistics (ONS)

Figure 2: Bank of England official bank rate, 2014-24

Source: Bank of England

The steady fall in inflation and other positive economic signals also allowed the then government to point to pay settlements being made that were higher than inflation. For many, it felt like pay increases were outstripping cost increases.

Figure 3 shows this recent increase in earnings and pay, but also how this interacts with official inflation figures. The affordability gap in 2023 is clear, as is its reduction in 2024 as inflation fell.

This does not mean that consumers and workers have recovered their cost of living losses. The question is whether people feel it is getting better for them, as opposed to what the data show at a macro level. The Asda Income Tracker in Figure 4 suggests a significant improvement over 2024, but do people feel this?

Figure 3: Real average weekly earnings single-month annual growth rates in Britain, seasonally adjusted, and CPIH rate, 2001-24

Source: ONS

Figure 4: Asda income tracker, year-on-year change, 2016-24

Source: Asda income tracker

It is worth recalling that in this context, falling inflation rates still means that prices are increasing, just less rapidly. While there has been some reduction in significant costs such as energy, they still remain at high levels (see Figure 5).

Figure 5: Real terms energy price indices in the domestic sector over the past five years, quarterly, UK

Source: Quarterly energy prices, September 2024

The overall effect of this volatility is to produce a very mixed picture. For some, especially the very wealthy, the impact over the last five years has been minimal. For people with savings, while inflation was high, returns also rose, easing the effect to some extent.

But for many, life has remained a struggle, and this has affected behaviour. This is clearly seen in work from the Joseph Rowntree Foundation (among others) on the persistence of poverty in the country (see Figure 6).

Figure 6: Number of low-income households in hardship, May-October 2024

Source: No end in sight for living standards crisis: JRF’s cost of living tracker, winter 2024, Joseph Rowntree Foundation

The persistence of household finance issues is also reflected in the retail sales figures. Although the gap between growth in sales volume and value is no longer increasing, the disparity remains (see Figure 7). Consumers have had to buy less, even if they spent more. They have also shopped around for bargains and traded down in brand terms.

Figure 7: Volume and value sales, seasonally adjusted, Great Britain, July 2019 to July 2024

Source: Retail sales, Great Britain, ONS

Has the change in government had any effect?

In July, a new Labour government was elected following a campaign for ‘change’. This followed persistent negative ratings of the previous Conservative government – sustained over several recent prime ministers – reflecting the population’s view of their economic competence.

The government’s honeymoon has not lasted long. While some of this may be political mischief-making by the media and others, the country appears to have soured on the government very quickly.

Economically, some of this is self-inflicted through the acceptance of the previous government’s approaches. Far from being a government of change, the new administration has been characterised to date as much of the same, if not worse for individuals. The post-Southport riots added to the sense of turmoil.

Further, the abolition of the winter fuel payment, followed by a budget based around national insurance increases for employers and closing inheritance tax loopholes for farmers, has led to more negativity and a feeling of pressure being piled on people and businesses.

Indeed, consumer confidence remains negative and has declined since the election (see Figure 8). This links to the recent decline in earnings/pay measures in the last month (Figure 4) and inflation increases (Figure 1).

Figure 8: UK consumer confidence indicator (GfK)

Source: UK consumer confidence

The full effects of many of the government’s budget measures will not be felt until 2025, but the negative perceptions appear to be set. What’s more, there is significant uncertainty and nervousness about the year ahead.

This is due to continued and deepening wars in Ukraine and the Middle East, and concerns about tariffs and trade wars under the incoming administration in the United States, each of which is affecting perceptions.

Even without these global risks, the government’s proposals to fix major state agencies and the economy will take time. With no immediate boost, people wonder if the current position is one we are stuck with and whether anything will change for the better.

For retailers in particular, the national insurance measures in the budget – combined with rates and other policy cost increases, such as a steep hike in the national living wage – add pressures to the cost base.

High street shops have also been preoccupied with a massive increase in shoplifting and violence against shop staff in 2024. Headlines about this retail crime wave add to perceptions of the safety of retail space, as well as requiring costly retailer responses.

How does all this affect Christmas?

Christmas is such a major event for consumers and retailers, but it will inevitably be experienced in different ways by people and organisations. Any look at the mass media and the trade press will see stories either about a fearful, or a cautiously confident or positive Christmas. Some retailers will no doubt do well; others may struggle.

The same is true for families and individuals. The economic realities would suggest that Christmas should be a solid one, but perceptions and concerns about the coming year could derail this. Equally, not everyone has shared in the improvement in 2024 compared with 2023. Recovery for many has been impossible.

Much also depends on the state of the retailers themselves and their organisation and management. The recent trajectory of Asda and Lidl/Aldi is an example. The last two years have seen the discounters gain market share rapidly, while Asda has lost out. Indeed, Asda is in both leadership and financial turmoil. The company’s need for a great Christmas is very strong, but will they be able to achieve it?

This need for a good Christmas may be stronger for many retailers than in previous years because of the economic situation and their perception of what next year will be like. Black Friday – another key date in the golden quarter – was later this year than before.

This combination may have accounted for an earlier retail start to Christmas, with Christmas either coming before or directly competing with Halloween in many businesses. This is a visual reflection of the importance of the period, but perhaps also a sense of desperation in some retail quarters to lock in early sales.

With the late Black Friday – coinciding with monthly pay and being only just over three weeks before Christmas – the starting gun on retail selling has now been fired. The initial sense is that Black Friday (or in reality the weeks around it) did see consumers spending. Retailers will hope this keeps up into the new year.

But an alternative view is that stretched consumers put off spending until Black Friday and have tried to lock in bargains at that point, leaving essentials only for the Christmas trade. Time will tell.

The key for retailers will be to turn consumer sentiment, which is variable and fragile, into spending. We know that consumers have been negatively affected by the last few years and are spending cautiously.

While Sensormatic (a monitor of consumer sentiment) reports that price reducing will be a factor this year, consumers increasingly value quality and choice. But this varies by individual and by cohort.

For example, generation Z (those born between the late 1990s and early 2010s) are much more engaged with the sustainability of products than boomers (those born between 1945 and the early 1960s). When it comes to brand loyalty, the reverse is true. Retailers will need to be aware of such differences and accommodate them.

Consequently, retailers need their stores, staff and online channels to be Christmas-ready to encourage these reticent shoppers to spend with them. Service and the product range need to be good, and the store and ambience need to make customers feel special. But this has to be done with an eye to encouraging the cash-cautious and value-conscious shopper.

More than most years, retailers need to ensure that it really does ‘feel a lot like Christmas’ to get consumers to spend.

Where can I find out more?

The Office for National Statistics (ONS) publishes regular updates on its data series and a range of analyses of the trends and directions. The ONS is also adding to its standard data series with a range of experimental data sets.
The House of Commons Library contains a range of reports and briefing papers on topics mentioned in this article.
Consumer confidence is reported monthly by GfK.
In addition to setting the current bank rate, the Bank of England produces a range of data on consumer and business activity.
The British Retail Consortium provides a range of data on the sector, often in association with partners.
Many retailers, suppliers, analysts and other organisations interested in the retail sector publish a wide range of reports, for example, the Asda and Sensormatic data used in this article.
Organisations such as the Joseph Rowntree Foundation, the Trussell Trust and More in Common provide information about poverty and its impacts on the population and consumers.