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Strategy Consulting Conversation with Ian McGarrigle, by RBC Capital Markets

Strategy Consulting Conversation with Ian McGarrigle, by RBC Capital Markets

Conversation with Ian McGarrigle, Chairman of the World Retail Congress, November 30, 2023

This feedback stems from a compelling conversation RBC Capital Markets engaged with Ian McGarrigle, Chairman of the World Retail Congress, discussing the prospective outlook for retailers in 2024. Read more insights from our collaboration with RBC here.

How do you see the consumer outlook for next year in major markets eg UK, Europe and the US?

Consumer confidence in the UK and Europe is quite fragile and there is no escaping from the cost of living crisis, which is impacting many households. This is shaping consumer behaviour and spending patterns. A recent consumer survey showed than c.1/3 of consumers intended to spend less next year. The US has been holding up a little better. There is still some nervousness on where the consumer is heading for next year. US consumers seem to be happier to spend than their UK and European counterparts.

Do you expect a general disinflation trend in the sector – i.e. lower sales growth but also lower cost growth?

This is factored in by retailers, who have accepted that they won’t be chasing strong sales numbers. In the early part of this year, the story was cost inflation. In more recent conversations, retailers are saying costs are coming down (raw materials are coming down, energy costs have reduced etc). This is making things easier. Grocery retailers are making pledges to focus more on prices next year, as their cost bases are falling. However, rents in prime locations aren’t going down and there was no mention of business rate reforms in the most recent UK Autumn statement. Additionally, the national living wage is going up by c.10% in the UK next April. Generally, we should be seeing retailers using that fall in inflation to their advantage. Retailers are focusing on profitability and sustainable growth, instead of chasing strong sales growth.

Should we worry about political risk for retailers next year, given likely elections in the UK and the US?

It could be an interesting next 12 months. There are also European Parliament elections next year. The US will be one to watch as no one really knows what the outcome of that will be or the implications for businesses/consumers. In the UK, with a change in government, there could be a positive uptick in consumer sentiment. The opinion polls suggest a hunger for change. The implications for businesses are still up in the air. There is potential for the uncertainty to constrain big ticket spend, particularly in the housing market (as people don’t know what is coming).

Do you expect retailers to look to deleverage in view of higher interest rates?

As interest rates and inflation have risen, the pressures on businesses has been enormous. We have seen some casualties from that already eg WIlko. There will likely be an increased focus on balance sheet management next year.

Do you expect consumers to spend less on “stuff” and more on “experiences” next year?

All consumers are making choices on how they spend their money. There has been an interesting trend since the easing of lockdowns – everyone thought that the shift to online would stick and everyone was surprised by the strength of the return of store based spend. This shows that consumers want to go out and shop. It will be interesting to see what retailers do to their stores to appeal more to consumers. Having the right product is key – there needs to be exciting, innovative new products to drive consumers to spend on things they need and want. Retailers have to fight for every dollar and give consumers a reason to spend with them. For example, you often see lines outside of Swatch shops, as they do limited edition lines. Another thing being discussed is mixed-used retail space, particularly in malls. It is about finding the right balance between retail, leisure, entertainment and F&B.

Are you seeing tech driving more personalization and localization in Retail?

One of the big headlines this year has been AI. There are lots of negatives and fears associated with it but many positives also such as personalisation. Personalisation is about understanding and knowing your customer better, down to a 1-on-1 level. This will be an interesting theme for the current year and beyond. This allows large retailers to have 1-on-1 dialogues with individual consumers. Consumers are tired of being bombarded with one size fits all campaigns and now retailers have the ability to tailor their campaigns.

With localisation, getting the offer right is key. The one size fits all dynamic isn’t really appropriate for the current dynamic.

Do you expect a normalization of discounting next year following several years of below average discounting?

Discounting remains an important tool for retailers. There was a sense pre covid, that certain retailers were over-using it, which was undermining price integrity. Black Friday has just passed and there have been questions around whether retailers have been using this to pump up prices beforehand. Likewise, there are questions whether it is right for the likes of Tesco to offer discounts with a Tesco Clubcard. Going into 2024, consumers are going to be even more price conscious. As inflation eases, it allows retailers to focus more on getting the right price. The success of Primark, Action, B&M is clearly value led. There is polarisation in retail – the luxury segment continues to show slowing but solid growth and value is growing strongly. It is the middle market that is potentially more squeezed.

Do you expect more M&A to take place in retail next year?

Yes. As ever, there will be winners and losers from the holiday period. We will no doubt see some weaker players either fall by the wayside or be acquired. We have seen some over this year eg Wilko and we will likely see ongoing consolidation across the next year. Retailers like NEXT and Frasers are now playing the role of seeing value in brands and picking them up. Authentic Brands has developed a number of brands and uses a licensing model to power this new strategy. Also the marketplace approach is a new business model that has been emerging in recent years. It is a way to look at your customers in a different way and collaborate with other brands to provide more for your consumer. This reinforces the strength of brands and the role they play in retail.

Are you seeing more venture capital/private equity interest in Retail?

Less so at this point in time. There is nervousness about how Retailing will play out and funding costs have risen. Profitability is a key factor and there is a still a question mark about who the successful businesses are and where money should go.

What were the most interesting themes coming out of World Retail Congress events so far in 2023?

The World Retail Congress last met back in April. Things were tougher in retail back in April and although there were challenges there, there was a mood of resilience.

A key topic was omnichannel. Even pureplay retailers have moved into the physical world and, for a pureplay retailer, this requires a reset and investment.

Technology and AI were also a big focus of conversations. Retailers now want to focus on how they can apply AI.

Sustainability was also a big topic. There is now a sense that this is critically important and that doing nothing will ultimately cost a business much more in the future than investing in sustainability would.

The theme for next year’s meeting is ‘High Performance Retail’. Retailers have now established that they have to plan for a macroeconomic issue and they can’t just accept a good performance but need to work to raise the bar and exceed the expectations of stakeholders.

How do you view the mood amongst retailers heading into next year?

There is a realistic view that the market is tough and it is hard to read how this Christmas will play out. A number of retailers are focusing on the long term view and what they need to do in the business. M&S is an example of a retailer that has had several ups and downs but are now planning for the long term and making big decisions on what they need to be. For example they are investing a considerable sum in refreshing stores and improving the product. There is a sense that retailers understand that this is the new reality and those that are on this path, see 2024 as a continuation of that. There is acknowledgement of a different environment but there is an understanding that they have the tools to offer what the consumer needs.