Investing.com -- The UK apparel retail sector is navigating a complex and uncertain landscape as it adjusts to shifting economic dynamics and evolving consumer behavior.
After several years of robust growth driven by price inflation, the market is expected to stabilize in 2025, with annual growth projected at 1.5%, slightly below its historical average of 2%.
Analysts at BofA Securities in a note dated Monday said that this normalization comes as retailers face mounting pressure from inflation, fiscal consolidation, and cautious consumer sentiment, despite some improvement in real wages.
Economic recovery in the UK remains fragile. While inflation eased in 2024, wage increases and changes to the National Insurance Contribution introduced in the October budget have added significant costs for businesses.
This has created ripple effects across the retail landscape, with companies forced to balance price increases against consumer affordability.
Disposable incomes have shown nominal growth but remain below 2021 levels when adjusted for inflation, leaving shoppers more price-sensitive and cautious in their spending habits.
Consumer confidence, a critical driver for retail performance, has experienced fluctuations. It dipped following the government’s budget announcement but showed signs of recovery toward the end of 2024.
This fragile optimism, however, is tempered by lingering concerns over persistent inflation and increased taxation, which could weigh on discretionary spending, including apparel purchases.
The UK apparel market has been shaped by several significant trends. Online retail, after stagnating between 2022 and 2024, has begun to rebound, marking a pivotal shift in the sector.
Digital sales gained momentum in the latter half of 2024, aided by favorable weather conditions and stronger seasonal demand.
Analysts expect this resurgence to continue, with online penetration projected to return to pre-pandemic levels by 2027, driven by a compound annual growth rate of 4%.
Companies heavily invested in digital strategies, such as Next (LON: NXT ), are likely to benefit the most from this shift, while others, like Primark, are catching up with initiatives such as click-and-collect services.
Despite these growth opportunities, the industry faces challenges from rising costs. The NIC (NASDAQ: EGOV ) changes have disproportionately impacted sectors with a high proportion of part-time workers, such as retail.
For instance, Marks & Spencer (OTC: MAKSY ) and Next are expected to face NIC-related cost increases of £60 million and £32 million, respectively, representing a 35-45% rise year-on-year.
To mitigate these pressures, many retailers plan modest price increases, typically around 1%, alongside other cost-cutting measures.
Market dynamics have also seen increased consolidation, with larger players like M&S, Next, and Associated British Foods (OTC: ASBFY ) (ABF) strengthening their positions.
M&S has been a standout performer, leveraging investments in store renovations, digital capabilities, and an enhanced product assortment to outperform the market.
The retailer’s appeal to younger, fashion-forward consumers, coupled with improved profitability from operational efficiencies, has earned it a "buy" rating from BofA analysts.
Next, known for its robust digital platform, has maintained a "neutral" rating, as its fair valuation reflects a balanced outlook of growth and reinvestment in marketing and technology. In contrast,
Associated British Foods, which owns Primark, received an "underperform" rating due to concerns over its limited like-for-like growth and rising input costs in its grocery division.