Consumer and retail industry outlook for 2023

In 2022, the industry widely anticipated a recession before the year was over. Whilst some economists estimate that the UK and US have entered a recession, others conclude that it all comes down to how a recession is defined. Technically, a recession means gross domestic product has declined for two successive quarters. Going into 2023 with high levels of inflation and the ongoing cost of living crisis, we expect to see a significant impact in the consumer and retail industry as it endeavours to survive the downturn. 

We’ve taken a look at the Economist Intelligence Unit’s (EIU) Consumer goods and retail outlook for 2023 to understand the challenges, opportunities and trends to watch in the consumer and retail industry over the coming year.

What can we expect in 2023?

In their forecast for 2022, EIU predicted that global retail markets would continue to recover from the impacts caused by the pandemic, growth in retail volumes would slow to 3.3%, and sales would finally exceed 2019 levels.

This year, the EIU assert that persistently high inflation will lead to 4.8% growth in global retail sales in nominal US dollar terms, but this headline rate is inflated by high prices. The 5 key areas to watch in relation to how retailers are responding to pricing pressure are: 

1. Inflation will push up global retail sales
2. Automation technologies to cut wage growth
3. Online sales growth will slow, but increased share of retail online sales globally
4. Discount stores will increase their market shares
5. Fresh challenges for global luxury brands 

Profits compressed by inflation

The general consensus is that global inflation is forecast at around 6.4% in 2023. Subsequently, with demand flattening, it is expected that retailers’ profits will be squeezed. Logistics and raw materials costs will naturally cause a challenge for retailers but additionally, they may be troubled by labour and energy costs.

EIU put forth that as a result, we can expect to see store closures, retail bankruptcies, and non-food retailers facing a higher risk. 

Cutting labour costs 

Having outpaced other sectors in recent years, retail wage growth will slow in 2023 and a method that retailers might use to protect profits this year is by cutting labour costs. Whilst there may not be mass redundancies, retailers may instead slow down the recruitment of new employees. 

Additionally, in a trend we’re seeing across all sectors, retailers are likely to utilise more automation, e.g. robots to process orders and manage stock, which will reduce headcounts. 

A shift in online retail sales

According to the EIU, online sales will keep growing, with a YOY growth of 6.1% increasing their share of global retail sales to more than 14%, only slightly outpacing the 13.9% share in 2022. The world's largest online retail market, China, will have a slower rate of sales growth due to its "zero-covid" rules, rising youth unemployment, a deteriorating economy, and government pressure on tech firms. In the meantime, the West will be struggling with a recession and the cost of living crisis.

Many emerging markets will be appealing for retail investment as a result of the expanding middle class, rising internet usage, and policy emphasis on digitalisation. Online sales will climb at a rate of over 20% in the Middle East, Africa, and Latin America in 2023, compared to 12% in Asia. For instance, Amazon aims to open operations in five new nations this year, with South Africa, Nigeria, and Colombia among the potential markets. 

A shift from hypermarkets to discount retailers

‘Big-box’ stores and hypermarkets are likely to lose market share to discount and convenience stores in 2023, reversing the pandemic-era trend, as lower spending power compels many middle-class consumers to spend less. This shift is already noticeable in the retail food business in inflation-stricken European economies. Aldi, for example, overtook Morrisons to become the fourth-largest grocery retailer in the UK. In the US, meanwhile, two of the biggest retailers, Walmart and Target, registered declines whilst discount and dollar stores grew in footfall. 

Consumers experiencing inflation also have a tendency to purchase less frequently but at lower price points. As long as fuel prices are high, this increases the cost of journeys to ‘big-box’ retailers and hypermarkets outside of towns. As a response, we may see more compact "express" stores that can compete more effectively with convenience stores. 

Fresh challenges for luxury brands

For international luxury businesses, the loss of Chinese tourists during the pandemic has been a setback. However, the desire from domestic Chinese purchasers allowed their sales to rebound to pre-covid levels in 2021. China's zero-covid rules hindered growth in 2022, although a recovery in the tourism sector in Europe provided some compensation. However, EIU expects there will be greater difficulties in 2023.

China's consumer spending will be underwhelming as long as the government upholds its zero-covid policy and the domestic economy is burdened by the slowing of key trading partners like the US and EU. Government crackdowns and COVID-19 have devastated China's real estate market, which was a significant source of income for wealthy Chinese. Youth unemployment is still high, which will limit demand from first-time luxury consumers, a crucial segment of the market for luxury brands.

In contrast to 2022, when pent-up demand propelled a tourism rebound, 2023 will see a marked slowdown in the increase of international visitor arrivals.

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Also coming down the line over the next couple of years is a ban on plastic packaging, an increase in the use of more sustainable fabrics, and better protection for consumers from online sellers, all of which will impact the commerce and retail industry. 

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