Over the past 10 to 15 years, the retail industry has enjoyed near-relentless growth, producing a market in which virtually all could continue to thrive, riding in a slipstream of rising demand.

Over the past 10 to 15 years, the retail industry has enjoyed near-relentless growth, producing a market in which virtually all could continue to thrive, riding in a slipstream of rising demand.

If retailers could add a store-opening programme at the same time, then it wasn’t all that difficult to produce a healthy level of growth. But now the door has closed on easy physical expansion and, more importantly, it has closed on demand growth as well.

In reality, demand is flat. It might not appear so as some retailers post healthy figures, but a lot of the growth seen in the past six or nine months has come from diverted spend. That is, money that previously had been spent at now-defunct retailers being spent elsewhere.

This is good news for those individual retailers that have benefited, but it does not represent growth for the industry as a whole. Nor is it sustainable growth, as it will soon work its way through the system.

At the same time as falling demand, we are also seeing a reversal of the inflationary trends of the past 12 or 18 months.

Just 12 months ago, there was double-digit food inflation and quite significant price deflation in non-food.

This situation has now reversed and it is no coincidence that a number of the major grocers have reported weak trading figures. In a period of double-digit inflation, all our major food retailers reported good growth; this is far harder to achieve now.

Non-food has had a lengthy period of deflation but this has also changed as UK retailers effectively import inflation from the growing economies of the Far East. The market now needs to be able to pass some of its cost increases onto the customer but, because demand is so weak, this will be challenging.

Looking at the consumer economy for the rest of this year and next, the outlook remains very tough. The consumer hasn’t got more money to spend; it is trending down and consumers and retailers alike will be watching the June 22 Budget with interest.

One measure that has excited speculation is an increase in VAT. I haven’t spoken with a single retail chief executive in the past six months who isn’t expecting this to happen.

An extra 2.5p in every pound going to the Exchequer will hit margins at a time when retailers will struggle to lower their costs further and will not necessarily be able to pass on costs to customers.

It will undoubtedly be a tough couple of years. However, this kind of trading climate magnifies the deficiencies of weak retailers and the attributes of strong retailers.

We will see a greater divergence of performance. The old days of losing share and still growing have gone; you will now have to grow market share to gain any growth worth speaking of.

The skills you need to do this are very different to the skills needed in years gone by. As a result we will see some retailers fail, but we will also see those retailers that understand demand and tune into it in a relevant way for their customers do very well.

Richard Hyman Strategic Retail Adviser, Deloitte