Retailers eager to optimise operations ahead of labour cost spikes

UK retailers are bracing for the cascading impact of recent Budget measures as rising wage cost pressures and weakening consumer confidence threaten to erode profits, squeeze margins and risk both store closures and possible insolvencies. 

Weakened momentum into year-end
Retail sales fell by 0.3% in December, capping a weak end to 2024 for the UK economy, according to ONS data, slightly below a growth forecast of 0.4%, according to a Reuters poll of economists. Looking at Q4, sales volumes fell by 0.8%. 

This disappointing retail data follows the smaller than expected 0.1% monthly rebound in GDP in November, which may imply the economy flatlined in the final quarter. Some forecasters suggest the latest data will boost calls for a Bank of England interest rate cut in February. However, Capital Economics suggests the economy’s recent malaise is temporary, predicting a 2.3% rise in real household disposable income and improved consumer confidence in 2025, driving consumer spending growth from 1.0% in 2024 to 1.6% in 2025. In January, UK consumer confidence fell sharply to the lowest level in more than a year, driven by a spike in government borrowing costs and declining confidence in the country’s economic prospects. The GfK consumer confidence index fell five points to minus 22, the lowest reading since the end of 2023, according to new data.

Retailers are adapting to an increasingly complex operating environment due to rising costs driven by measures announced in the UK’s Autumn Budget. A consortium of retail CEOs warned the Chancellor that industry costs could increase by over £7bn in 2025, citing:

• National Living Wage (NLW) increases (£2.73bn),
• Employer National Insurance (ENI) threshold changes and rate increases (£2.33bn),
• The reformed packaging levy (£2bn).

Retailers plan to raise prices
In a survey of 5,000 businesses conducted by the British Chambers of Commerce (BCC) and published in January, more than half (55%) of companies said they expect to raise their prices in the next three months, up from 39% in Q3 2024. Three-quarters of firms (75%) cited labour costs as their main cost pressure, while four out of ten (42%) of retail and hospitality firms reported scaling back investment as business confidence slumps to 2022 levels. 

Additionally, one-fifth (21%) of firms expect turnover to worsen over the next 12 months. The British Retail Consortium (BRC) survey of UK retailer CFOs highlighted three primary concerns: falling demand, re-accelerating inflation, and increasing tax and regulatory burdens. Spending trends reflect a shift in consumer behaviour, with shoppers buying fewer but slightly more expensive items, a trend expected to persist into 2025, according to high street fashion retailer Next.

Budget woes hurt 2025 profit outlooks
Individual retailers are already warning investors of the impending financial impact. Next, which operates 458 stores across the UK, estimates a £73m annual hit from NLW and ENI changes, creating a disproportionate increase in the cost of part-time store roles by 13%. The retailer warned of “anaemic” sales and profit growth in 2025, reported in its 7 January trading statement. 

Rising costs are forcing retailers to seek operational efficiencies, invest in automation, and implement cost-saving measures across warehouses, distribution networks, and stores. Retailers are investing in electronic shelf price labels, returns machines, robot bag packers and more self-service tills, reports The Guardian. Many are passing on costs to consumers through price increases. Tesco and Sainsbury’s are among the most affected, with estimates by Morgan Stanley implying increased annual tax bills of £250m and £140m, respectively, reports The Sunday Times. Sainsbury’s has warned that customers will face higher grocery prices. Separately, the supermarket announced it will cut 3,000 staff and close its remaining 61 Sainsbury’s Cafés in an accelerated cost-saving drive to save £1bn to offset the Budget’s precipitous cost increases to businesses. Morrisons and Wetherspoons also face higher tax bills to the tune of £70m and £60m respectively. Bakery Greggs faces an extra £97m in costs over two years, according to Deutsche Bank estimates.

Marks & Spencer’s said the Budget has made it more reluctant to hire new staff after increasing the retailer’s annual costs by £120m to £520m. M&S plans to strip £500m of costs out of its business by early 2028, reports The Telegraph. “We’ve got to be more productive, so that’s how we’re going to mitigate our costs,” said M&S CEO Stuart Machin. The retailer plans to modernise its store estate at a faster pace, improve its website and arrest declining international sales.

Financial distress rising 
The number of UK retailers in critical financial distress surged by more than 25% quarter-on-quarter to 2,124 in the first 11 weeks of Q4 2024 (Q3 2024: 1696), according to Begbies Traynor data, underscoring a deteriorating outlook. The latest data from Begbies Traynor shows that by market segment, consumer-facing sectors highlight the concerning picture in the UK economy, including general retailers (+47.6%) and food and drug retailers (+37.4%) both in worrying states of financial health. In addition, critical financial distress increased by 29.3% among general retailers to 1,457 businesses (Q3 2024: 1,127) and by 17.2% among food and drug retailers to 667 businesses (Q3 2024: 569). By market segment, critical financial distress increased by 29.3% among general retailers to 1,457 businesses (Q3 2024: 1,127) and by 17.2% among food and drug retailers to 667 businesses (Q3 2024: 569). The data shows that a total of 28,747 retail businesses in the UK are also in ‘significant’ financial distress. In separate data, almost 13,500 retail stores completely closed down in the last 12 months, a rise of 28% on 2023, according to figures compiled by the Centre for Retail Research (CRR).

Store closures
Back in mid-November, CDS Superstores, owner of The Range and Wilko, struck a deal to acquire the Homebase brand name and up to 70 of its UK stores, after Homebase entered administration. Homebase has around 3,600 employees and 133 stores across the UK. Hilco, the private equity owner of Homebase, had failed to find an outright buyer, prompting the appointment of joint administrators from Teneo. Sainsbury’s, which co-founded Homebase in 1979, announced plans last summer to buy ten Homebase stores and convert them into supermarkets. 

Store closures have continued into the new year. Shoe Zone reported that “a number of stores … have now become unviable” due to NLW and ENI increases. The footwear chain expects its profit before tax in FY2025 to drop from £10m to £5m, with 20 stores across its 297-strong portfolio at risk of closure across the UK, including in Wolverhampton, Birmingham, Shropshire, Worcestershire, Warwickshire and Staffordshire, the BBC reported.

In late January, WH Smith put its legacy retail business up for sale, in a move that creates uncertainty for its 5,000 staff. It is seeking a buyer for its 500 UK high street stores to free itself to focus on its successful travel arm, which has branches in airports all over the world. Modella Capital, Hilco and Alteri are reportedly among the bidders circling. 

Poundland, the discount retailer which operates 825 stores across the UK, is exploring a CVA or restructuring plan that could pave the way for significant store closures or a trade sale, according to Sky News. Poundland is owned by Pepco Group. Quiz, the fast fashion chain, has hired Teneo to explore either a CVA or pre-pack administration to force through store closures, likely to be unpopular with landlords. Quiz has around 60 stores and employs roughly 1,500 people. Up to one-third of its store portfolio is at risk, according to The Telegraph. Finally, Select Fashion plans to close four more stores across the UK by the end of January, following entering its third CVA procedure last summer, according to a Companies House filing, in a bid to keep trading while renegotiating its rent. 

Retailers need to strengthen resilience
Even for resilient retail businesses, the pressures remain relentless, and many will likely face financial challenges as the year matures and these difficulties compound over time. BTG Advisory can offer retailers a diagnostic assessment to identify cost reductions and inefficiencies, to optimise working capital, operational performance and cash flow generation. Our team can also help with debt restructuring, provide access to debt and equity capital, and renegotiate leases with landlords. Retailers may also benefit from an independent assessment of their balance sheet to help strike the balance between working capital requirements with growth and investment ambitions.