Sector trends

Trends for retail and leisure: an overview of 2021

A summary of the full report, with graphs and charts.

“As the pandemic continues to unfold, many retail and hospitality businesses will remain in survival mode,” says Richard Lim, founder and CEO of Retail Economics. “They are cutting costs to preserve working capital and attempting to strengthen balance sheets to weather the storm as effectively as possible.”

It is a situation that David Scott, head of retail and leisure at NatWest, has witnessed often in the past year. “Those businesses with very traditional operating models are certainly having a tough time of it,” he says. “But the harsh circumstances do mean that companies are having to focus on digital channels, and adapting to growing online demand.”

Lim agrees, pointing out that many businesses are thriving in the digital-first environment. “They are well positioned to grasp opportunities in emerging markets, retain loyal customers and win new ones as consumers seek alternatives that meet new expectations,” he adds.

“However, these changes will be felt unevenly across different sectors, channels and regions as the ‘new normal’ emerges.”

Ten trends affecting businesses

Trend 1: Consumer spending is changing

Buying behaviour is changing among many consumers, who are split into four groups: the Unfazed (36%), who have not changed their behaviour; Reverters (27%), who have changed but will rediscover old habits after the pandemic; Part-shifters (18%), who have changed some buying habits; and Fundamentals (18%), who have permanently changed habits across the board.

Spending habits for 2021 also divide into four groups. Confident consumers will spend more but only comprise 8% of consumers. The rest split between Undeterred (49%), who will spend the same; the Cautious (31%), who will cut back on some spending and wait; and Hibernators (13%) who will cut down on all non-essentials.

Trend 2: Consumer confidence correlates with perceived duration of disruption

During the first lockdown in March 2020, most consumers imagined a six-month period of disruption and have since had to reconsider. Now 38% think that their lives will return to normal by June 2021; 55% by September 2021; and 65% by December 2021. But 35% believe it will take longer, and 16% think things will never return to normal.

Digital connectivity is the link between consumers, businesses and brands. The pandemic has completely rewired the customer journey, and businesses will need to adopt a digital-first approach

Consumers who believe that it will take longer than 12 months for their lives to return to normal are significantly more likely to cut back on discretionary spending in 2021, with younger consumers more pessimistic. Households have also boosted saving, and more affluent households have a larger proportion of their spending that can be delayed.

Trend 3: Online is a huge focus

Online sales as a proportion of overall retail spend reached 28% in 2020. This means the online penetration rate achieved five years of growth in 2020 alone. The closure of leisure, hospitality and non-essential retail in lockdown shifted consumers online: 46% of consumers made an online purchase that they previously only purchased in-store. About one in three believe this change in behaviour will be permanent.

Trend 4: Digital needs to be prioritised in the customer journey

Digital connectivity is the link between consumers, businesses and brands. The pandemic has completely rewired the customer journey, and businesses will need to adopt a digital-first approach.

The journey begins with awareness, as consumers discover businesses, brands, products and services across different channels. Structural changes in the workplace and the locations of many office jobs will also affect consumer behaviour. Reduced footfall in city centres is an obvious factor that is stunting sales growth in otherwise popular locations. Likewise, more time spent at home increases the chances of successful product deliveries. This journey is also affected because 61% of workers say that coronavirus has influenced how and where they shop. Those on higher salaries are also more likely to work from home.

Trend 5: The role of physical stores is changing

Successful stores will be dazzling consumer experiences that create emotive ties to a brand. A physical outlet’s value will be measured against new performance metrics, as stores become powerful media assets that integrate digital strategies, rather than just working as distribution hubs. They will use more sophisticated techniques to assess the quality and value of in-store interactions, too, and the data they gather will be used for analytics.

Significantly, almost a quarter (24%) of consumers have purchased a retail product while they have been in a store. However, this rises to almost half (47%) for 18-24-year-olds.

Trend 6: Brands are connecting directly with consumers

Consumers are getting accustomed to purchasing directly from brands, and the move to online means brands can embrace customer-facing channels. This is commercially good, of course, but it also allows brands to discover deeper insights about their customers, have greater control of the customer experience and enhance brand differentiation.

Businesses will need to adapt their models and perhaps invest in logistics or analytics. But they may even see an opportunity, given falling rents, to create own-brand stores to increase the effectiveness of their online presence. Among consumers, 47% say price is the most important motive when buying direct.

Trend 7: Sustainability is climbing the agenda

Supply chains, conscientious investors and consumer pressure mean that sustainability considerations are more important than ever.

Shortening supply chains will reduce emissions resulting from the transportation of goods, and local manufacturing may be more carbon efficient. There is rising demand for sustainable investment, from large pension funds to retail investors, with 360 new sustainability focused funds launched in 2019. Some 45% of consumers believe they are responsible for reducing carbon emissions through their choice of purchases, and British consumers are prepared to pay more for locally made products if they have a positive impact on the environment.

Trend 8: Supply chains need to be more resilient

The coronavirus pandemic has shown that supply chains are as strong as their weakest link. Factory closures around the world caused a ripple effect, leading to global disruption highlighting the risk of relying on a single country, having too few suppliers, and operating a ‘just in time’ model. Businesses are expected to explore shorter supply chains and reshoring, as well as reducing their reliance on single-country supply and having the option to switch sources. These measures may come at a cost to margin.

Trend 9: Businesses are facing up to Brexit

The major goal of the Brexit negotiation – a free trade agreement (FTA) – with the EU has been achieved. This gives a level of certainty for UK businesses sourcing from the EU, and for retailers selling directly to the EU via e-commerce. New tariff costs on trade with the EU have been avoided altogether, and the agreement contains provisions to minimise the cost of regulatory friction at the border – though it is too early to say how well this will work.

There is inevitably more paperwork at the border and rules of origin regulations will increase administration costs, and in some cases mean additional tariffs.

Future FTAs with countries such as the US, Australian and New Zealand could lead to a reduction in tariff costs on imports of consumer goods, especially for food and drink.

Trend 10: Businesses need new models

As businesses adapt to new challenges, they will need to alter their business models. If many consumers will have permanently altered their own behaviour, if there have been five years of growth in online shopping in 12 months, and if businesses require different uses for physical stores, their models must embrace strategic changes such as accelerated IT investment, acquisition, and specialisation.

This material is published by NatWest Group plc (“NatWest Group”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest Group and NatWest Group makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the NatWest Group Economics Department, as of this date and are subject to change without notice.

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