UK retail sector's profitability under pressure amid inflation: Fitch

14 Oct '23

2 min read

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Insights

The UK retail sector is showing signs of stabilising profitability but remains challenged by high inflation and competition, as per Fitch Ratings.
Smaller firms are especially vulnerable.
Despite wage increases, full profitability recovery isn't expected until 2024-2025.
Retailers are also focusing on cost-saving measures and limiting store expansion.

The UK retail sector's profitability is stabilising but continues to face significant headwinds from ongoing high inflation, according to Fitch Ratings. The firm notes that smaller companies are particularly vulnerable as they struggle more than their diversified counterparts to absorb rising costs.

Consumers are feeling the pinch from high prices, rising interest rates affecting mortgage and consumer credit payments, and dwindling savings that were built up during the pandemic. While recent wage hikes may ease some spending pressures, the UK retail sector is unlikely to see a swift recovery in profitability due to intense competition. Fitch estimates that most rated non-food retailers, expected to be the hardest hit, will see their profit margins reach a bottom by the end of 2023 but full recovery isn't anticipated until 2024-2025.

Inflation has been the primary challenge for retailers over the last two years, creating a difficult environment for profitability, as per Fitch.

Capital expenditures (capex) among UK retailers have been curtailed in 2023, with the majority of investments being funnelled into maintenance, warehouse and store automation, and bolstering online operations. Investment in store expansion has been notably limited, a trend expected to continue into 2024.

Moreover, UK retailers have been focusing on optimising their working capital since 2021. Fitch expects these efforts to contribute positively to free cash flow generation within the sector in 2023.

Fibre2Fashion News Desk (DP)

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