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Consumers have more discretionary money (only 17% of consumers say they have to limit their spend [1] and over half of consumers feel more financially secure, with wages outpacing inflation. But with 2/3rds of people worried about the UK economy [1] and over half of people thinking the UK economy will worsen, this is leading to careful money management, with over 40% reducing daily spend and 30% deferring big purchases [1].

There are potential headwinds on consumer wallets as energy and water bills have increased for consumers, and inflation is expected to rise over the coming months, peaking at around 3.6% by the autumn [2]. Supply bills are expecting to decrease, though insurance costs rise.

As a result, The RTT Economist anticipates a lacklustre 2025 and 2026 for household spending. While retail is expected to see more growth than other sectors, in part reflecting price increases, overall growth is projected to be minimal. Consumer spending is expected to be 1.3% in 2025 (up from 0.6% in 2024 [2]) and food sales will grow, driven by inflation.

Retailers need to be considering strategies to trigger spending as consumers do have headroom, as well as built up savings from the savings ratio peaking at 12% of income in Q4 2024 [2] This ability to capture consumer spending will determine the clear winners and losers. Despite headwinds, grocery will remain strong as it fulfils essential needs. Whereas discretionary spend on non-food retail and leisure are likely to feel the pinch.

Costs have already increased in Q2 2025 due to macroeconomic factors, as well as National Living Wage increases at 6.7%, and NIC increases which the BRC estimated at £2.33bn annually.

Energy prices for businesses are expected to rise due to wholesale gas prices and geopolitical instability, affecting retailers and their suppliers.

The labour market shows easing wage pressure, with pay growth expected to fall to 3.9% over the next 12 months [3]. Retailers will also have an eye to the cost impact of upcoming changes to workers rights.

Food retailers

Food input inflation is expected to increase due to tariffs, peaking at 4.5% by the summer [1]. Despite headlines ‘grocery price wars� the RTT expects the grocers to each hold to their pricing strategies. Continued focus on loyalty schemes which enables targeted price reductions as well as personalised offers is expected.

U.S. Tariffs

Despite concerns about US tariffs, only approximately 5% of UK exports are affected [4], hence the RTT Economist expects the direct impact on UK GDP and the 2025 forecast to be minimal. However, if the possible imposition of a 50% tariff on the EU is not satisfactorily resolved by negotiation before the 9 July deadline, the UK economy will be caught in the crossfire, since the EU is our largest trading partner.

Price offsets and re-negotiated exchange rate mechanisms with manufacturers will offset these increases short term; and new supply chains/manufacturing locations longer term.

However, uncertainty on tariffs, as well as unpredictable FX movements, has an impact on business confidence and investment which affects all retailers, and the overall UK economy.

The rise of e-commerce has provided convenience, greater choice and an ability to compare prices and quality more easily for customers. For retailers it provides 24-7 access to consumers and greater data availability, but more competition.

The best retailers no longer think of physical/online, but blur these lines as stores become more digital, e-comm finds physical ways to connect with customers, and the customer journey demands a seamless experience across channels.

But don’t forget the store

In food retail, in store continues to outperform online, as consumers still like to do the grocery shop in person and retailers struggle to drive a profitable business model; however, the instore experience is increasingly digital with self-scanning, digital screens, loyalty schemes and digital shelf labels. GenAI is making personalised recipes and shopping lists a reality,

Many retailers are still increasing physical presence with some retailers including Cook, Aldi and many more opening space. And using that space to enhance the experience, such as beauty consultants or fashion parties.

E-comm has put even more pressure on price

Consumers are typically more price-sensitive than in-store; switching websites or apps is easy, compared to walking to another shop. ECDB data shows an 11% add to cart rate, with 8% then abandoning[5]; perhaps changing their minds on the purchase, or perhaps then finding a better price, or cheaper/quicker delivery elsewhere.

The rise of value-end Chinese players such as Temu and Shein � who have grown over 20% in Q1[1] � shows the challenge for UK retailers in e-comm.

Outside of price, online retailers can also add value through differentiated customer experience, for example considering the role of packaging and their choice of logistics provider.

Going direct to consumer

Brands are increasingly selling their products directly to consumer, whether Nike trainers or Diageo’s premium whiskeys, blurring the line between retailers and manufacturers. Doing both: D2C and wholesale brings advantages, for example On Running who sell direct and with retailers such as JD Sports to access consumers and knowledge.

Secondhand:

Although still relatively small overall in the market, second-hand marketplaces such as Vinted are disrupting traditional retail with the rise of supply in affordable, quality second-hand products. Second-hand fashion is now taking up 10% of fashion sales [6]. It is not yet clear if this is increasing overall spending or taking value from traditional retail.

Online marketplaces:

The ability to provide an even greater shelf, but without the requirements around stock, make marketplaces a new and exciting business model. With Tesco joining the likes of B&Q and Superdrug. Teething problems around customers understanding different delivery charges and timings, or that these products are not available in store must be worked through; but the enhanced breadth of customer data is hugely valuable too.

Quick commerce:

As consumers have more money, convenience rises back up priority list, being a top 3 purchasing driver for 28% of consumers on everyday items.

Rapid online grocery delivery is now 7% of the market [6]. While consumers still want the cheapest price for the product, many will pay for convenience.

Q-comm has branched beyond takeaways into grocery and other items, for example, B&Q and Screwfix collaborating with the platforms to provide solutions for both consumers and trade.

One big question is how quickly do consumers really need things? The UK is settling back to around 30 minutes, but other countries such as India are still striving for under 10 minutes.

The providers though are consolidating as scale is so important, whether this is predicting consumer demand, or having the precise geo-location to know how long it takes to get to a 4th floor flat.

For retailers, particularly grocers, one challenges comes from working with multiple platforms where the platforms own marketing and promotion drives demand that is hard to forecast.

The rise of Social commerce

Social media has evolved to be so much more than sharing life updates with family and friends. Now consumers expect to be entertained, with video content remaining king. Brands and retailers have been navigating what this shift means for their brand engagement and advertising plans, and increasingly their social commerce strategy.

Social media apps know how to make online shopping more engaging and convenient for consumers, and increasingly shoppers are “clicking through� influencer ads, affiliate links and sponsored posts to buy. TikTok being a key player in this space with growth of over 20% in Q1[1].

But for many brands they are concerned about the ability to ensure the integrity of the audience they reach for age-appropriate products and reassure consumers of quality and experience. Retailers have a key role to play in curation and assurance to consumers and must maximise this.

The role of Agentic AI in spending

Consumers are already looking to Chat GPT and other GenAI apps for inspiration on recipes, birthday gifts, and more.

But the RTT sees far more potential; in the US some retailers are already working with AI providers to offer a curated shopping list which is delivered straight to your fridge � a personal agent who knows what you want, when you want it, your allergies, your preferences and when you’re home.

But history tells us consumers don’t want to stop shopping, we want convenience and inspiration - the retailers who use AI to do both will be the winners.

To read more about the role of AI in shaping the future of retail, read ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø’s Intelligent Retail Report.

Presented by the Retail Think Tank