If you’re looking to navigate change and seize opportunities amid challenging market conditions, download our report today.

Households are recalibrating their approach to budget and choice. As the ripple effects of recent years begin to settle, those businesses that seize opportunities to innovate, connect, and respond to evolving consumer demands are likely to thrive. 

David Scott, our Head of Consumer Industries, says: "I’m thrilled to share our latest outlook report, which combines exclusive insights from Retail Economics proprietary data with findings from the latest consumer surveys. This comprehensive analysis delves into the key factors shaping the retail, leisure, and hospitality sectors, offering actionable strategies to overcome challenges and seize emerging opportunities.

“As we move further into 2025, it’s clear that the trends highlighted in this report will drive transformative change for years to come. Prioritising partnerships, harnessing technology, staying deeply connected with customers, and fostering staff engagement are critical for sustained success."

On the factors and megatrends shaping consumers and sectors in 2025, Richard Lim share his insights:

"As we step into 2025, cautious optimism defines the retail landscape. Stabilising inflation and real earnings growth offer respite, yet businesses face a wave of rising operating costs against a backdrop shifting consumer behaviour. 

“Retailers must act now to future-proof their operations — embracing digital technologies to remain relevant, while putting agility and adaptability at the heart of their business. 

“Those who adapt to these trends are more likely to emerge as leaders in a challenging market, fostering loyalty and long-term success.”

While 2024 was characterised by significant economic challenges and fiscal policy changes, 2025 marks a transitional phase as businesses and consumers adapt to cautious stability.

Inflationary pressures are stabilising, and real earnings growth is emerging, offering respite after a prolonged squeeze. 

However, businesses must navigate the complexities of the new fiscal landscape and align their capabilities with shifting consumer expectations to succeed. Recovery remains uneven due to geopolitical instability, economic uncertainty, and new policy impacts.

Key insights for UK retail and leisure businesses in 2025

• Selective discretionary spending: Consumers are prioritising experiences and affordable luxuries.
• Value-conscious behaviour: Continued emphasis on value for money despite improved finances.
• Household financial management: Balancing spending with precautionary saving and reducing personal debt levels.
• Omnichannel is becoming non-negotiable: From tailored recommendations to personalised loyalty programmes, the value of personalisation is undeniable.
• AI, robotics, and machine learning is making automation more commercially viable: New providers allow businesses to scale, streamline processes, and respond flexibly to changing market conditions.

Understanding the macroeconomic landscape in 2025

The UK economy is expected to grow between 1% and 2% in 2025. Inflation is projected to increase to around 2.75% by the second half of 2025 before gradually falling back.

Interest rates are expected to fall to an average of 3.7% by the fourth quarter of 2025, reducing borrowing costs for businesses and households. However, businesses need top-line revenue growth of at least 2.75% to drive volume growth.

Seb Burnside, our Chief Economist, says: "Business costs rose more quickly across three-quarters of the UK's nations and regions in December, underpinned by increasing wages and salaries. 

“With these costs expected to rise further in the coming months as the announced increases in employers' national insurance contributions and the national minimum wage come into effect, firms’ growth expectations are subdued by historical standards in most parts of the UK.”

Key finding:

Affluent households are driving spending on experiences, with increases in holidays (+12.8%), transport (+15.0%), and services (+13.6%), reflecting their financial flexibility.

Autumn Budget 2024: Key impacts on UK retail and consumer trends

The Budget introduced significant fiscal policy changes, including increased government spending, taxation, and borrowing.

The increase in employer National Insurance Contributions (NICs) impacts the cost base for many businesses. Businesses anticipate negative impacts from increased employer NICs and National Living Wage (NLW) requirements. There is also uncertainty around how Budget measures might affect consumer behaviour.

Households are adjusting financial strategies in response to evolving economic conditions, prioritising debt reduction, savings, and selective spending. Discretionary incomes are projected to rise in 2025, though growth patterns vary significantly across households.

Affluent households are driving spending on experiences, while lower-income groups are tightening their belts .

David frequently meets with retail, leisure and hospitality businesses around the UK to gain more insight into the practices of market-leading businesses. 

On consumer behaviour, he says, the message is clear: “Don’t wait – from start-ups to the largest PLCs, the biggest danger is failing to keep up with changing consumer behaviours.”

Businesses are investing heavily in six key areas of digital transformation to streamline operations, enhance customer experiences, and adapt to evolving market demands. This includes experimenting with new technologies like artificial intelligence (AI) and identifying partners and ecosystems for collaborative innovation.

David says: “The rapid advancement of AI, the ongoing skills shortage and the cost equation of people versus technology have all shifted to help push automation up the agenda for more businesses." 

“As labour costs rise, more retailers are accepting the case for automation, particularly for more repetitive tasks. However, just because you can automate a process doesn’t mean that you should: firms still need to be clear why they’re investing and what they stand to gain."

“Those businesses that stay ahead of the curve will support staff to manage and operate new technology, which will free up their time to focus on high value work like creativity and customer experiences.”

Key finding:

Implementation costs, lack of expertise, and system integration challenges consistently emerge as the primary obstacles limiting digital transformation and innovation efforts.

If you’re aiming to navigate the evolving market landscape, make informed strategic decisions, and maintain competitiveness, here are some of the opportunities we’ve identified in the Report.

• Technology and innovation: Embracing digital transformation and leveraging technology to maintain relevancy and a competitive edge.
• E-commerce growth: Online retail sales are forecast to accelerate by 4.5% in 2025 to £128.8bn, the strongest annual growth since 2021. Retailers can capitalise on this trend by enhancing their online presence and diversifying their digital offerings.
• Consumer experiences: Enhancing customer experiences through improved digital interfaces and personalised services.
• Omnichannel strategies: Implementing seamless integration between online and offline channels, such as click-and-collect services, could enhance customer experience and drive sales.
• Sustainability: Aligning business capabilities with shifting consumer expectations and embracing sustainability may attract a growing segment of environmentally conscious consumers.

Key finding:

Health & Beauty remains the standout non-essential retail category, as households prioritise wellbeing and look to discover products on social platforms.

Key challenges for UK retailers in 2025

UK retailers face significant challenges in 2025, including rising operational costs and economic pressures leading to store closures, while at the same time capitalising on opportunities for innovation and future growth. 

• Economic uncertainty: Navigating a complex environment with changes to fiscal policy and restrictive monetary policy.
• Supply chain disruptions: Ongoing global supply chain issues continue to affect product availability, leading to potential delays and increased costs for retailers.
• Cost pressures: Retailers are facing increased expenses due to higher employer National Insurance contributions and a rise in the National Living Wage. These factors are diminishing retailers’ capacity to absorb price pressures, making it unlikely for prices to decrease.
• Consumer confidence: Addressing subdued consumer demand and aligning business plans with consumer expectations.

Our latest Future Fit research revealed the ways in which leading consumer businesses in the retail sector secure long-term competitive advantage.

The data showed that by prioritising change, businesses could better meet market demand, reduce costs, access capital and drive innovation. 

1. Prepare for future talent success Map workforce skills for the medium to long term, and work hard to promote retail, hospitality and leisure as exciting and rewarding.
2. Consider data-led approaches to strategy For example, if middle-income households are selectively spending on travel, could you tailor your strategy to this distinct group?
3. Emphasise value Businesses could emphasise value, quality, and long-term benefits in their offerings to unlock consumer spending.
4. Strengthen service leadership Evaluate staff skills in delivering exceptional experiences that are enhanced by digital offerings.
5. Enhance sustainability efforts Prioritise transparent and sustainable sourcing practices, waste reduction, and clear communication to address unmet consumer values.
6. Build on experience innovation Continue to enhance customisable offerings and seamless digital interactions to meet rising expectations for flexibility and convenience.
7. Reset the relationship between buyer and supplier Focus on areas where interests align and collaborate with greater transparency.
8. Use sustainability imperatives such as the increased focus on Scope 3 emissions as a means through which to encourage collaboration.
9. Believe in the power of partnerships Identify opportunities to work more closely with partners up and down the value chain.
10. Collaborate Identify opportunities to work more closely with partners up and down the value chain.

By acting now to prioritise change, your business could be more ready to boost future resilience, meet market demand, reduce costs, or access capital. Find out about all the ways we could support you here:

Retail | NatWest

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