2013 is likely to be another turbulent year for retail, so what are the key trends retailers need to be aware of? Caroline Parry looks at the forecasts for the year ahead.

Retailers are gearing up for a challenging year

2012 was quite a year – from the sad demise of Comet to the heady heights of successful overseas growth for retailers from Asos to M&S, the industry has faced everything from the sublime to the distinctly difficult.

It looks as though this tumultuous journey will continue into 2013. While some retailers will have a great time of it, others will falter – and few will find it a smooth journey. Economic problems will continue to make things tough, shopping habits will keep shifting, and complacency will not be well rewarded.

As former Wickes, Iceland and Focus DIY chief executive Bill Grimsey says: “2013 is shaping up to be yet another tough year on the High Street. It will see an increase in empty shops on the High Streets around the country.”

“The start of the year will be tough,” agrees Lloyds TSB head of retail for large corporate Charles Lamplugh. The economy is forecasted to remain flat over the year and the retail sector is expected to reflect that. Verdict forecasts growth of 1.8% in its ‘How the UK Will Shop in 2013’ report, in partnership with business analytics firm SAS. The rate is the highest since the start of the recession in 2008 but will largely be driven by price inflation.

But while the economy continues to stagnate, retail change will march on regardless. Kingfisher chief executive Ian Cheshire says three key trends will impact on businesses in 2013. He says: “My three big themes for 2013 will be mobile internet changing multichannel retail, the acceleration of international retail and further consolidation moves across Europe as slow growth puts pressure on smaller players.”

Category growth

Within the expected growth figure of 1.8%, some categories will perform better than others. Grocery will be the main driver with 2.9% growth predicted – but much of this will be due to rising grain and fuel prices, with families buying the same volume of shopping as last year but at higher prices. Neil Saunders, managing director at analyst at Conlumino, echoes the report’s findings. He says: “Rising commodity costs will drive price inflation and dampen volume growth.”

For this reason, the sector will continue to see a high level of promotional activity. Saunders says: “Online, discount and convenience will be the growth channels for food in 2013.”

But price promotions won’t be the grocers’ only response to a difficult environment – Waitrose, for instance, will be emphasising the fun side of food shopping. Managing director Mark Price says grocery shopping remains an “accessible pleasure” for many consumers, especially when other, more expensive treats are deemed out of reach.

Price says: “When times are tough, going to your supermarket for meal ideas is one of life’s accessible pleasures, so the pace of our product development will be faster than ever.” But he adds value will continue to be as crucial as ever. “The quest for great value is now part of the British way of life. We’ll continue to respond to that, with no sacrifice of quality or integrity,” he says.

Grimsey predicts further polarisation in the grocery sector, which could spell trouble for the middle market. He says: “2013 will see the first signs of a disturbing new category of retailers under pressure. There is already evidence of a polarisation in the food sector, with Waitrose and the likes of Aldi and Lidl benefitting, but this leaves a squeezed middle of Tescos, Sainsburys and Morrisons, with Morrisons seeming particularly vulnerable to a profits warning.”

Over in non-food, Verdict forecasts a return to growth of 0.8%, meaning spending levels will reach £173.3bn over the year. Saunders, meanwhile, believes that polarisation between value and premium ranges, as well as continued online growth, will be key trends.

Verdict’s report also predicts DIY and gardening – last year the victim of a washout summer – as the strongest performing sector. Decorative materials will be the most buoyant part of the DIY category – the main factor for this, the report says, will be “shoppers conducting small decorating projects to freshen up their homes and make minor repairs, as they start to consider putting their homes on the market”.

These signs of life in the housing market support tentative hopes that consumer confidence might begin to rise – despite a knock-back in December, when a Conlumino shopper poll showed 59% of consumers say they plan to cut retail spending in the next six months.

Music and video will be the biggest loser in the non-food categories, falling by 6.3% as shoppers find cheaper prices online and as ownership of tablet devices and smartphones continues to grow. Online book sales, meanwhile, are expected to overtake bricks-and-mortar sales for the first time.

The rise of online

Online is expected to account for 11% of total retail spend over 2013, and Verdict predicts this will reach 15% by 2017. But as bricks-and-mortar retailers invest more in their multichannel offer, etailers will have to sharpen their offer to stay ahead of the game.

Saunders says: “Etailers are realising they need to provide brilliant service and many are now having to reshape and invest in their supply chain infrastructure to develop this.”

Cheshire says mobile will begin to have even more of an impact on retail in 2013, a point echoed by Forrest Research principal analyst Martin Gill. He says: “We believe that online retail will continue to grow at a significantly faster rate than overall retail growth, but etailers in 2013 will be under increasing pressure to find new ways to secure that growth.”

He adds: “2012 was definitely the year of mobile for the UK, as Debenhams and Tesco followed the earlier lead of John Lewis in encouraging shoppers to embrace mobile through in-store wi-fi.” This year, mobile’s prevalence is expected to become even more widespread.

In 2013, it will not be enough to have a mobile-optimised site or application – tablet-optimised sites will also become important. Gill explains: “To take full advantage of the tablet platform, retailers in sectors such as fashion and beauty must look to the likes of Gucci and develop a more rounded strategy that creates a compelling and rich tablet-optimised shopping experience.”

Play.com-owner Rakuten, the world’s third largest ecommerce marketplace, says there will be more channel integration via apps, QR codes and augmented reality. Mobile will also become an increasingly important payment tool and social channels will continue to influence online strategy, particularly when it comes to increasing loyalty and engagement with shoppers.

Meanwhile, sites such as Pinterest are gaining traction as they allow people to organise products into themed collections that they can share with their friends. The belief is these collections influence other shoppers, who will use them to inform their purchasing decisions.

For Lloyds’ Lamplugh, retailers will also be under more pressure to invest in their supply chains. “Retailers need to look closely at their supply chains as it is not as easy to get product out of China,” he says.

He adds retailers, particularly those in fashion sector who require a faster turnaround, will begin to move their supply chains geographically closer to the UK. Longer-term, he predicts better partnerships between suppliers and retailers will be forged. He explains: “This will lead to proper plans for the future and less chopping and changing suppliers. With consumers driving the shift to new channels, having stability elsewhere in the business will be essential and a significant advantage.”

Ruth Jackson, retail consultant at SAS UK and Ireland, predicts that there will be higher demand for home delivery options and click-and-collect. She says: “Customers now expect retailers to go the extra mile to meet their demands, meaning they need to extend supply chain capabilities.”

Shrinking space

This shift in consumer expectations, combined with another business rates rise this year, means there will be a further contraction of space, Saunders says, as retailers are forced to make their stores work harder. “High street stores will have to deliver a high return on sales to earn their keep.”

Landlords need to see this trend as an opportunity rather than a threat, says Miles Dunnett, head of asset management at Grosvenor Liverpool Fund. He says: “Understanding the role their assets can play in integrating multichannel in physical environments to increase a location’s appeal to drive footfall will be key.”

Rationalising space will continue to be a key trend, particularly in DIY where retail space is expected to decline by 1.1% over the year, according to Verdict. Cheshire says there will be further consolidation as “slow growth puts pressure on smaller retailers”. Weaker independents are expected to disappear completely, while the larger DIY superstore chains are closing stores and sub-letting space to third parties.

Investment in in-store technology – for both customers and staff – is also expected to accelerate. Gill says US retailer Home Depot and a handful of European examples such as John Lewis, Burberry and Marks & Spencer are leading the way, and others will need to follow quickly. He says: “The leaders will transform these schemes from experiments to full scale roll-out, while laggards will come under increasing pressure from both their customers and their senior executives to develop their own strategies.”

International expansion

And it’s not all about the home front – international markets will continue to offer opportunities for growth in 2013. Verdict practice leader for UK retail Maureen Hinton says: “In general, consumers will be paying more in 2013 for the same items and, as a result, retailers will continue to look to international markets such as Europe, India and the US for real growth opportunities.”

The fashion sector, where sales are predicted to dip below £1bn in 2013 in the UK, is particularly active on this front. H&M, Marks & Spencer, Primark and Topshop will continue to seek expansion in Eastern Europe, North America and, of course, China. India is also expected to become more attractive to retailers, with Topshop and Uniqlo reportedly eyeing the market, while Debenhams and M&S, which already have stores there, are thought to be looking to expand.

Cross-border growth will also be a key online strategy, says Gill. He believes that more retailers will look to follow the likes of Asos, firstly by expanding their shipping options to include international delivery, and then by opening transactional websites in new markets.

While it is impossible to know exactly what conditions retailers will face in 2013 – who could have foreseen, for instance, last summer’s extreme wet weather – SAS’s Jackson believes retailers need to take a more proactive approach when it comes to predictions. She explains: “Taking a more forward-looking approach to predict shopping trends and understand the impact of decisions will help many retailers to weather the storm ahead more effectively.”

Meanwhile, Lamplugh says that lessons must be learnt from last year’s bad weather in terms of the need for cross-seasonal products.

The key to retail success, he adds, will be as deceptively simple as it has always been – offering the right product to the right customer through the right channel sounds easy, but 2013 will be as challenging as ever for retailers across the board.