Where does the Retail Sector Envision its Future?

Industry experts credit this to inflationary pressures, cautious consumer spending, and increased supply chain challenges.

Consumers continue to show more discretion in their shopping decisions. Brands have realised it is no more the era of simply discounts that would earlier woo customers.

With customers having modified their approach to buying just for the needs and not the wants, the profit margins for retailers are thin and hence, their businesses are suffering. In fact, a shocking 274 profit warnings were issued by companies during 2024 in the United Kingdom.

As per an EY Parthenon report, one in five (19%) UK-listed companies issued a profit warning in 2024, the third highest annual proportion in 25 years, behind only the 2020 pandemic (35%) and the impact of the dot-com bubble burst and 9/11 in 2001 (23%).

Industry experts credit this to inflationary pressures, cautious consumer spending, and increased supply chain challenges.

Silvia Rindone, EY Partner and UK&I Retail Lead, says, “Profit warnings in the retail sector remained prevalent in 2024. Whilst festive trading reports were broadly positive, they highlight that demand is only part of the story. Despite an increase in disposable incomes in 2024, consumer confidence has been slow to rebound following the cost-of-living crisis, resulting in a disappointing end to the year for many retailers.”

Top Challenges for Retailers

Jitender Miglani, Principal Forecast Analyst at Forrester enlists five primary challenges that retailers face owing to increased interest rates.

• Retailers’ top line will be impacted by the decline in consumer spending
• Business investments for retailers will witness obstruction due to higher borrowing costs
• Consumer confidence will further decline due to the sinking economy
• Inventory management will take hits owing to hike in carrying costs and slow-moving inventory
• Profit margins for businesses will suffer due to excessive promotions and discounts

“It’s clear that shoppers are willing to spend if the price is right and the proposition is strong. However, retailers’ uncertainty over how much rising costs can be offset through automation and efficiency savings, or passed on in price increases, is making them almost universally cautious about the year ahead. Higher employment costs and the investment needed to adapt to changing consumer behaviour will challenge every retailer during 2025,” adds Rindone.

Exploring Root Causes Behind Profit Dips

The study notes that the leading factor behind profit warnings in 2024 was contract and order cancellations or delays. This was cited in 34% of warnings, including 39% in Q4 – the highest quarterly percentage for this reason in more than 15 years. Increasing costs triggered nearly one in five (18%) warnings in the last 12 months.

Jo Robinson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader, says, “It’s clear that companies have faced an extraordinary succession of forecasting challenges since the pandemic, contending with interconnected disruptions to supply chains, material and energy costs, and the labour market, as well as higher interest rates.”

“2024 was also an exceptional year for global geopolitical uncertainty and policy upheaval, with a record level of profit warnings linked to contract and spending delays as businesses held back from recruitment and investment. As a result, companies’ forecasting strategies need to respond to both short-term policy changes and deeper structural issues,” Robinson adds.