Unveiling the future of retail: EIU's 2024 outlook

From the bustling aisles of brick-and-mortar stores, now filled with "experiential shopping" experiences, to the fast-changing landscapes of online commerce, with an ever-increasing number of pure players and discounters entering the game, what are the latest trends shaping consumer goods and retail? Will inflation fluctuating rates keep on influencing consumer habits? How will retail strategy react to these adjustments? The Economist Intelligence Unit's (EIU, the research and analysis division of the Economist Group) steps into the future of retail with key insights for 2024.

Indeed, data shows that retail stands as the largest industrial ecosystem, contributing to 11.5 percent of EU value added and serving as the primary employer in the EU economy, with nearly 30 million employees according to the European Commission. An ecosystem which consists of 5.5 million companies, with 99 percent of them being SMEs (small and midsize enterprises, ed.), generating a gross value added of over 1.4 billion euros. In brief, the retail ecosystem surpasses all other industrial ecosystems in terms of value. Its health and wealth are thus of prime importance for the functioning of the economy. Speaking of its state, what is the situation? What the EIU has noticed is that as inflation rates continue to rise in North America and Europe, online retailers have felt the impact as consumers cut back on spending and return to physical stores in search of bargains. This prompts the question: will inflation continue to affect the retail sector in the coming months?

“The reason this question exists for a lot of companies is because last year was a very confusing year for many brands, across many industries,” said a representative of the EIU to FashionUnited. “I’ll tell you why: because everywhere we are seeing in every newspaper that the “interest rate is going up”, “inflation is going up”, “everything is going to be more expensive”. And while many retailers are projecting a downturn in sales, sales across many industries, especially in apparel and fashion, stayed moderately stable. Now, that is a little bit confusing. Because everything is indeed getting more expensive, people are being paid less, rent and the cost of living is going up. However, sales are remaining quite stable."

The representative continued: "The reason behind that is what we call 'Covid savings'. Many consumers, bolstered by significant savings accrued during the pandemic, exhibited remarkable resilience in their spending habits. Consumers spending hasn’t dropped, because they had all that money saved during Covid. Meaning that if they wanted to buy a Burberry dress, they would go buy the Burberry dress. The difficulty is that the market hasn’t corrected it yet. What we are forecasting for 2024 and 2025, is a correction in terms of cost of living, Consumer Price Index (CPI), and Covid-related savings. All of these elements start to reduce now, meaning that the market is probably going to correct it. As a result of that, you are going to see that little bit of a downturn in relation to consumer spending. More of a shift from in-store retail, to online retail because naturally it is cheaper, and offers far more choice.” And this statement makes a perfect introduction to the subject at hand.

Deciphering retail trends: EIU's 2024 analysis

Backed by the EIU’s Consumer goods and retail outlook 2024 report data, the organisation projects a significant growth of 6.7 percent in US dollar terms and 2 percent in volume terms for retail sales in the upcoming year. This growth is attributed to a slowdown in inflation, signalling positive momentum for the industry. However, this welcome slowdown in inflation will come hand in hand with a concerning trend: a depletion in household savings, which will render them highly price-sensitive, and present new challenges for retailers and consumer goods manufacturers.

On a global scale, real growth in retail volumes is forecasted to reach 2 percent in 2024. Despite online retail's consistent role as a growth driver since the onset of the pandemic, challenges persist. During the EIU webinar on March 12, 2024, Aishwarya Tendolkar, research analyst, noted that expectations for inflation are that it will decelerate to 6 percent in 2024, compared to 9.2 percent in 2022 and 7.3 percent in 2023. Developed economies, particularly affected by the cost-of-living crisis, are projected to experience a notable slowdown in inflation to 2 percent. The EIU suggests that the monitoring cycle has largely concluded, with central banks, notably in the US and EU, expected to commence rate easing from mid-2024. It is noteworthy that while easing is anticipated, interest rates are unlikely to return to the ultra-low levels seen in the 2010s.

According to Barsali Bhattacharyya, deputy director of industry analysis, savings in most developed economies are currently below pre-pandemic levels from the early 2020s. This decline in savings, coupled with sluggish wage growth, has inevitably weakened purchasing power and led to increased borrowing by households. Low-income households and younger consumers, who are likely to experience greater financial strain, are particularly affected by this. Conversely, high-income households are more likely to have preserved a portion of their savings, resulting in a greater polarisation in consumer spending patterns.

So, what does that mean in terms of sales growth?

Looking at growth data, the EIU anticipates global retail growth to reach 2 percent in volume terms in 2024, up 0.8 percent from 2023. This improvement is primarily attributed to the deceleration of inflation. But there are regional disparities. While Asia and the Middle East are expected to experience the swiftest retail growth, the situation in Europe is (only) gradually improving compared to 2023. Retail expansion in the latter will remain relatively subdued, with consumers exhibiting price sensitivity. This presents a favourable outlook for discount and budget retail chains, which are poised to sustain performance and expand their market presence.

As mentioned earlier, in North America and Europe, escalating inflation has posed challenges for online retailers, prompting consumers to reduce spending and return to traditional stores in search of cost-effective options. However, is this the sole factor influencing online sales? In Western nations, the prevalence of single-person households and an ageing demographic also contributes to a preference for brick-and-mortar shopping among these consumers. While online retail sales are projected to constitute approximately 11 percent of total retail sales on average in 2024, the primary growth will be driven by emerging markets.

What's next: Where will consumers direct their spending?

Regarding consumer spending, while the premium market is expected to thrive, the middle market will face pressure. This trend is exemplified by the closure of numerous mid-range stores or the bankruptcy of longstanding retail groups such as the UK-born Ted Baker, which appointed an administrator this March to rescue the business, the Dutch Scotch and Soda which filed for bankruptcy in 2023 and was then acquired by Bluestar Alliance, or the UK-based Missguided which also collapsed in 2022 before being rescued by the British Frasers Group. The name “Missguided” was finally bought in late 2023 by Shein. Consumers will maintain their price sensitivity, prioritising essentials like food and energy bills while actively seeking out deals. However, sectors like leisure and hospitality are poised for growth. Is this an opportunity for leisurewear and athleisure wear brands, which are already trending, to expand further? Or for brands to enhance their offerings of holiday-related collections?

Turning our attention to luxury goods, "younger consumers are showing a preference for spending on experiences rather than material possessions, and they typically represent a significant portion of entry-level luxury shoppers," stated EIU’s Tendolkar. This assertion found support in an article by the Financial Times from March 2024, which highlighted Prada's intensified focus on its retail strategy. The company plans to invest one billion euros over the next five years in its retail offering to address the growing inclination among high-end luxury consumers towards "experiential shopping", according to Patrizio Bertelli, co-CEO of Prada Group. Once again, the growth within this segment is expected to be primarily driven by Asia and the Middle East. In other regions, a noteworthy trend is the growing demand for pre-owned luxury items. This is particularly evident in Europe, where constrained consumer spending has fueled increased interest in second-hand goods. These more budget-friendly alternatives are expected to gain traction, particularly among younger consumers who prioritise sustainability. Bhattacharyya highlighted this shift, mentioning that it has even prompted Amazon to venture into the luxury resale market. However, overall, the EIU anticipates a slowdown in the luxury market for 2024.

Facing the margin squeeze: Retail's next moves

Retail margins are facing significant pressure, prompting concerns about what lies ahead. While certain brands have managed to increase their prices to offset rising costs associated with raw materials, shipping, and fuel, thereby bolstering their profits, the situation is more nuanced for retailers.

Interestingly, retail jobs are poised to expand, with some players planning to enhance their physical presence. Overall, retail employment has now returned to pre-pandemic levels. However, there have been significant layoff announcements targeting office staff and white-collar workers. Although storage and warehouse jobs surged during the pandemic, this trend is expected to reverse again. These roles have indeed been on the decline since 2021 and 2022, largely due to businesses investing in warehouse automation to reduce labour costs and streamline supply chain and inventory management processes, as highlighted by the Economist's director. But this is changing now. For instance, Nike unveiled plans to lay off 2 percent of its workforce, equating to approximately 1,500 employees, though it clarified that store workers are unlikely to be affected. Why? Because investments in store automation in Europe and America have encountered challenges, as many customers in these regions prefer human checkout and cashier interactions. The trend reverses.

While automation was initially envisioned as a means to employ fewer people while offering higher salaries to those retained, businesses have increasingly turned to it to address new challenges arising from events such as the pandemic and recent geopolitical upheavals. Speaking of the political realm, Europe has seen a strengthening of legislation aimed at fostering clean and responsible industries. An important development in this regard involved the retail sector. On May 24, 2023, when the European Commission published the Retail Investment Strategy (RIS). According to information provided on the Commission’s website, "the RIS introduces a series of proposed legal and regulatory measures designed to promote retail investor participation and strengthen consumer trust. The proposal focuses on digitalisation, efficiency, sustainability, competitiveness, and modal shift, aiming to provide a framework for RIS deployment, ensuring data availability, and harmonising technical specifications."

As a result, three primary dilemmas seem to loom over Europe's textile and apparel retail sector in the forthcoming years: compliance, sourcing, and product management.