After a tough 2022-2023 period dominated by inflation, the retail sector started its recovery in 2024 and was initially expected to shift into higher gear in 2025, considering the better macroeconomic outlook, including stronger growth, lower inflation and lower interest rates in most developed countries, besides the extension of a consumption-friendly subsidy program in China. However, the tightening of trade conditions caused by substantial tariff hikes and the end of the tax-exemption rule on small package (de minimis rule) in the US now threatens the outlook for retailers. The changing rules question the efficiency and business legitimacy of traditional supply chains. If operating costs rise substantially, some retailers could be forced to modify their sourcing policies and look for new partners to dodge tariff hikes, and/or pass-through some charges on customers by rising prices to protect already razor-thin margins. A drastic change of sourcing policy could imply massive investment and a multi-year transition period for retailers before being fully operational. Large companies with ample cash reserves will be best positioned to navigate the stormy waters, while smaller corporates could face some solvency issues. Bankruptcy risks are high in Europe, where the retail market is particularly vulnerable because of tight competition between local and international players and also a noticeable shift of consumer behaviour since the pandemic.
In term of revenue growth, however, Europe shows the highest potential – a little bit stronger in Eastern Europe (2026-28 CAGR at +10%) compared to Western Europe (+7%) – as the high savings ratio implies strong purchasing power, though it will need a trigger to be unlocked. Still highly price-sensitive, European households could benefit from some positive side effects of trade tensions as China could decide to target Europe to absorb its industrial output surplus, flooding the region with discounted manufacturing products. Consumer confidence remains fragile and still strongly sensitive to global inflation newsflow as the energy crisis in 2022 let some indelible marks. In the US, the outlook for retailer looks less rosy (+4%) as new tariff policy threatens slower growth and higher prices for households, and extra costs to absorb for retailers. International companies that used to source from Mexico or China may need to overhaul their sourcing strategy to focus on local businesses and/or nearby trade partners. In China, domestic consumption remains deeply subsidized by the government but despite the stimulus we do not expect much more medium single-digit growth for the next three years as some pitfalls persist (weak real estate market, deflationary pressures). Among emerging countries, Latin America looks relatively less attractive (+3%) for retailers as we expect a negative economic shock in the region due to new US tariff policy.
Beyond the macroeconomic environment, retailers are also facing a total shift in framework and need to reconsider their core business strategies as consumer preferences, demography and spending behaviors change. Indeed, aging societies in the main developed economies will force retailers to adapt their value proposal to the older age group that has larger purchasing power but is less inclined to splurge. In the meantime, Gen-Z has a drastically different approach, favoring a seamless experience, digital channels and more personalization of products, while also being more selective and more volatile. Despite their limited purchasing power, Gen-Z is more predisposed to impulsive purchases and holds significant influence via their social networks that companies cannot overlook.
In the meantime, the quick development of AI technology offers new leverage for the industry to improve internal process – better efficiency and cost management – but also the hit ratio on digital channels via better customization of their products and more targeted advertising campaigns online. As the old brick-and-mortar model reaches some limits, the online retail business is expected to grow further as the digital segment becomes a distinct distribution channel directly incorporated into the business strategy of retailers.
