Reading the tea leaves
What the rest of 2025 holds for retail and hospitality businesses
The last few days have presented a series of data-points that offer us a glimpse into the rest of the year and the risks and opportunities which are likely to present themselves to consumer businesses. I’ve picked out three:
Most recently, yesterday the Chancellor and the OBR offered up a view of the near term performance of the economy - the headline being short term sluggishness but a chance of longer term growth.
Earlier in the week, UK inflation figures came in ever so slightly lower than forecast, though still higher than target. They included a very unexpected deflation in clothing prices and almost zero inflation in furniture and household goods, but worryingly sticky figures for a number of other retail sectors.
And last week brought an even more practical insight into the rest of the year from, all places, Wetherspoons.
Say what you like about Spoons, it is an indisputably well run business which operates 796 pubs around the country that seem to be doing good business all day with a strong beer and food offering. In its last full year of trading it did just over £2bn of turnover from those sites.
So why mention it in an analysis of the current economy? Because beyond its success in selling all day breakfasts, it tells us two important things:
Firstly that, like most consumer businesses, it trades on pretty low net margins - that £2bn of revenue turned into £140m of operating profit, a 6.8% margin, which in turn becomes £58.5m, or a 2.9% net margin, after interest and tax costs. These are very healthy figures by comparison with many others in retail and hospitality, but still show starkly that even a business with huge scale like Spoons is only ever a small sneeze away from breakeven.
And secondly, the interim results they have just published highlight exactly one of those sneezes. The business calculates that the incremental cost of the increases to National Living Wage and employers NI will cost it £60m a year. That’s right - almost half of its operating profit gone.
So if we try to turn these three data sources - the OBR, the ONS and Spoons - into a set of watch-outs and ideas for other businesses, what kind of list do we come up with? Here are a few thoughts:
The massive cost increases created by the NLW and NI hikes can only, in the end, translate into further inflation. It will be important for every business to be ready for that - try to increase your prices too early and you’ll get caught out by your competition, but leave it too late and you’ll see your input costs rise before your prices do, turning those thin margins into dust.
On the other hand, there are also lessons from the current inflation figures about the consumer marketplace too. The reason clothing prices fell in the period is that more retailers than last year had to remain on sale in February. That shows just how hard they are having to chase a consumer who has little confidence in their economic future (as the GFK consumer confidence index illustrates). From the retailers I speak to, that phenomenon is not limited to the clothing sector - everyone is having to fight hard for business.
There are, however, some green shoots in the economy if you look hard enough - real wages are rising and interest rates are coming down, and whilst those have not yet translated into increased consumer confidence it does seem likely that they will do soon, and as has been the case throughout there are successful retail and hospitality businesses producing good results from market share gains.
Now all of this soothsaying will, of course, be tossed and turned by the ever-changing US policy on tariffs and the impact that has on global trade wars. US tariffs have changed at least twice whilst I’ve been writing this post and will almost certainly have changed again before you read it. That uncertainty is bad for business, almost regardless of what the tariff policy itself ends up being.
And tariffs are not the only macro-risk. Freight rates and currency movements have been reasonably helpful for many retailers over the last few months, but we live in uncertain times and that could change on any given day.
Nonetheless, my advice for consumer businesses looking at how to get through the rest of the year remains fairly timeless. Focus on the things you can control, do the best job you can for your customers, keep a very close eye on trading margins and manage the inflation-game for the rest of the year carefully.
If there is one thing recent retail results show clearly, as we’ve reported here before, it is that those retailers who are growing market share by winning customers are turning in strong results, building their balance sheet resources and expanding.
The last thing you want to do in a weak market is also be losing market share - so more than ever, this is the time to up your competitive game. If your business really stands for something that your customers value, they will stick with you. Just ask Spoons.