‘As the storm abates, mothballed growth strategies are being rekindled’

The past three years have been an unprecedented challenge for retail, from enforced lockdowns to severe supply chain disruption, the re-emergence of inflation and the prospect of a(nother) debilitating period of recession.

It’s easy to understand why brands and retailers have become beleaguered, with executives focused on fierce headwinds on the supply and demand sides. The media narrative over the past 12 months has been unrelentingly and unhelpfully negative, exacerbating an already difficult situation.

Yet it now appears that a recession, gloomily forecast to be the longest and deepest in living memory, may be avoided – the message we increasingly hear from executives is that, while conditions undoubtedly remain tough, their worst fears have not come to pass.

We’re not out of the woods but the outlook, particularly as the planning cycle for 2024 commences, is considerably less bleak than it might have been.

“We’re not out of the woods but the outlook, particularly as the planning cycle for 2024 commences, is considerably less bleak than it might have been”

There are genuine reasons for a little more optimism. Business confidence is on the rise – most recent data points show their highest levels since May last year, which represents a stark contrast even to the early months of 2023. From a retail perspective, consumer confidence remains subdued but is undoubtedly tracking up.

Inflation continues to be the single biggest economic challenge for households, but there is evidence not only that it has passed its peak but is likely to moderate, potentially rapidly.

Wholesale energy prices have fallen dramatically over the past six months (for some contracts prices are down by more than 85% from their peak and are 50% lower versus a year ago), which means that the most pessimistic outcomes for consumers, businesses – and government borrowing – are now likely to be avoided.

Food inflation remains stubbornly high but commodity prices, which act as reliable lead indicators, are now down year on year. You should expect grocery shelf price inflation to track lower over the next 12 months.

Freight rates, another important supply chain cost and factor in the prices that consumers pay, are also down by around 80% from peak levels and back at pre-Covid levels.

The labour market, which tends to be a lagging indicator, has remained relatively robust in contrast to the recessionary periods in the 1980s and early 1990s. To the extent that this may act to embed inflationary trends, there is some evidence that hiring conditions are becoming slightly easier.

Although there is still an unusually high number of open positions in the economy, total vacancies have fallen by 13%, or 200,000 roles, since this time last year. Removing a little of the heat from this area is no bad thing when it comes to re-establishing a more stable environment.

“The retail industry, particularly in the UK, is heavily exposed to currency fluctuations and here too the picture is brighter”

The retail industry, particularly in the UK, is heavily exposed to currency fluctuations and here too the picture is brighter. Sterling has staged a rally from the dark days of autumn when macroeconomic trends and policy blunders were bringing parity with the dollar (or worse) into sharp focus.

Sterling is now broadly flat against the dollar year on year and, all things being equal, is likely to become a significant deflationary force within the UK’s import-heavy economy over the balance of the year.

From an operational standpoint, the glut of inventory that amassed through 2021 and 2022 has not been entirely cleared but it is, progressively, being worked through. Supply and demand are coming back into balance.

At True, we do not believe that we are rapidly transitioning from bust to boom. Pressure on consumers and scar tissue within the industry is still too acute for that.

But the storm, which turned out not to be a hurricane, may be easing as significant and compounding headwinds sequentially abate. The most progressive executives in our network are alive to these factors and, while retaining focus on the challenges that remain, are preparing to capture the opportunities that will re-emerge.

Growth strategies, understandably mothballed over the past 12 months, are being re-evaluated and rekindled. It’s still raining, but the time is right to come out of the storm shelter.