• Growth prospects for some subsectors remain uncertain
• Increased leisure spending could affect retail
• Inflation will drive sales growth 
• Cost-of-living rises could dent consumer confidence

Many parts of the retail sector benefited from a downturn in spending on travel, leisure and hospitality during periods of lockdown. But as consumers regain confidence to spend in these areas, demand across other parts of the retail sector could be suppressed. 

Rises in NI contributions and the prospect of further interest rate hikes could dent consumer confidence and, if so, this is likely to erode discretionary spending. Inflation may also rattle consumer confidence, but it will be a key driver of sales growth across the industry as a whole, says the report.

This sector is expected to see a slight decline of 1.1% in 2022 although sales will be supported by rising inflation. Profitability will come under pressure from rising operating costs, the migration to online, and growing competition from rapid delivery players like Deliveroo and Uber Eats. Consumers with tighter budgets are likely to shop around for the best deals, so discounters will prosper. Online is expected to maintain a similar share of total sales, which rose to around 12% in 2021, as retailers ramp up capacity for picking, packing and distribution.

Despite online capacity being well established within the sector, the strength of sales in 2022 will be highly susceptible to government guidance on working from home and social distancing. But with the effects of the pandemic expected to be more muted than in 2021, consumer demand should return with more consistency, and be more aligned with pre-pandemic levels. Supply chain issues are expected to persist, putting pressure on profit margins, while for brands like Nike, Adidas and Levi’s, selling direct to consumer (DTC) will remain a key feature. Issues around sustainability will intensify.

The strong demand for big-ticket items during lockdown is beginning to wane and spending is expected to decrease in 2022. Electricals is a very price-sensitive sector, and retailers will find it difficult to pass on escalating costs against a backdrop of squeezed household incomes and softer consumer confidence. Meanwhile, structural changes in the telecoms market will continue to undermine growth, together with ongoing supply chain disruptions, well into 2022. This will be underlined by more microchip shortages and other curtailed supplies.

Consumers with tighter budgets are likely to shop around for the best deals, so discounters will prosper

The housing market has cooled following the removal of stamp duty relief and a more pessimistic outlook for the wider economy, which is likely to negatively affect homewares and furniture retailers. Lessening volume of housing transactions means the furniture sector will face tougher conditions than homewares (which benefits from consumers’ ‘improve not move’ mentality). Supply chain disruption also remains a considerable issue for the industry, evidenced by many retailers being unable to fulfil orders within their promised delivery dates. These issues are likely to persist well into 2022.

Furlough and lockdowns provided many households with the means and time for DIY and renovation projects, which brought forward demand. But momentum within the sector is forecast to slow as society edges towards some semblance of normality. A revival in leisure and hospitality will also compete for spending in this sector, and troublesome supply chain issues are likely to continue into 2022.

Working from home, fewer social events and shop closures kept this sector under pressure last year, but the return to office work and more socialising will provide stronger demand for beauty products in 2022. Trends seen throughout the pandemic (eg greater focus on skincare) could become more permanent with consumers having discovered new products and their benefits. And demand for some health products, such as sanitiser gels, is also likely to remain, thanks to behaviours that became engrained during the pandemic.