Retail sales remain high in the United States and are recovering in Europe, but uncertainty may derail the ongoing recovery. In Europe, retail sales are rebounding unevenly, with modest increases in countries like France and Spain (+1.6% YoY in France from January to September 2024, and +1.4% in Spain), while Germany and Italy are recovering more slowly. In the UK and the US, retail sales have remained solid, growing at about +2% during the same period.
The Price Party is Over: Retailer Profitability is Under Pressure Due to Rising Inventory Levels. Retailers worldwide are grappling to maintain profitability, as declining sales volumes and still-high operational costs erode margins.
Online Shopping Will Stay, But Responsible Purchasing Takes a Back Seat. E-commerce experienced a sharp rise, and global revenues are expected to exceed $6.5 trillion by 2029, though growth is slowing (with a CAGR of +9.5% compared to +13.5% in the previous five years).
Looking ahead, artificial intelligence and automation could deliver a technological dividend for retailers. Retailers are increasingly investing in technology to optimize supply chain management and enhance operational efficiency.
The Consumer Blues
According to Allianz Trade’s analysis, retail sales are showing mixed results across key markets. The latest data from January to September 2023 and 2024 show very different patterns across economies. In France, retail sales increased from a -2.2% YoY drop in the first nine months of 2023 to a +1.6% YoY rise in 2024, suggesting a rebound in consumer spending as inflationary pressures ease. However, Germany shows only marginal improvement, moving from negative growth in 2023 to a slow +0.1% growth in 2024, reflecting ongoing economic challenges. Spain exhibits relatively resilient sales growth, with a slight slowdown in 2024, signaling cooling demand, possibly due to lower confidence. Meanwhile, retail sales in Italy, though recovering, remain negative at -1.0% in 2024. The UK follows a similar trend, with sales growth slowing from +5.6% in 2023 to a still-strong +2.0% in 2024, suggesting that UK consumers continue to spend despite persistent inflation and high interest rates. In the US, retail sales remain strong, though slowing, with growth dropping from +3.5% in 2023 to +2.2% in 2024, in line with a slowing but still-strong US economy.
Wealthier and Younger Consumers Drive Retail Spending, Especially in the US. In recent years, affluent consumers have become a major driver of retail sales growth, particularly in the UK and the US. This trend has been especially noticeable as wealthier households have benefitted from significant increases in income, home equity, and stock market investments, enabling them to increase consumption despite inflation and higher interest rates. This contrasts with pre-pandemic spending behavior, where a broader demographic had a more even share in retail spending. Now, higher-income households have not only maintained but even increased their spending across various retail categories, balancing the more restrained spending observed among lower-income groups. This trend is reflected in the strong sales performance of luxury goods and high-end services, sectors that have seen significant growth driven by the purchasing power of wealthier Americans. On the other hand, essential goods and services, which make up a larger portion of lower-income households’ budgets, have seen only modest growth. This divergence in spending patterns has contributed to the growing influence of wealthy consumers in the retail landscape. In the UK, the upper middle class saw the greatest growth, while the top 20% saw less growth than the bottom 20%. This highlights that the dominance of wealthier individuals remains a strong feature, particularly in the US. Moreover, younger buyers, a relatively smaller demographic in most developed economies, are spending more than older ones. These two trends could have significant consequences for the retail industry, which may need to adapt its product offerings and customer service accordingly.
European Consumer Sentiment
Consumer confidence is one of the key factors driving trends in savings and spending, shaped and stimulated by divergent economic trends – especially varying inflation trends – and by political and labor market dynamics. In France, consumer confidence in October stood at 95; though subdued and below the threshold of 100, it rebounded from the lowest levels seen in the summer of 2022, when consumers were severely impacted by inflation due to the war in Ukraine. Most other major European economies show a similar pattern. In Italy, the confidence index in October was 97.4. Although consumer confidence remains negative in Germany, Spain, and the UK, it is showing signs of recovery. Despite recent easing of both inflation and interest rates, consumers remain somewhat downbeat, influenced by significant economic and political uncertainty in many countries, including troubles in the German industry, the ongoing war in Ukraine, tensions in the Middle East, political instability in France and Germany, and rising food prices. In contrast, the United States stands out with a consumer confidence index of 108.2, highlighting the resilience of its economy. As inflation decreases and interest rates fall, a strong labor market and higher disposable income have helped improve US consumer sentiment. Looking forward, a potential return of Trump’s administration may implement pro-business measures, but his policies could also reignite inflation, negatively impacting consumer confidence.
Consumer Confidence Indicators
Sources: LSEG Datastream, Allianz Research
Europe is More Vulnerable to Political Uncertainty Shocks. European consumers are much more sensitive to negative news than their American counterparts, a trend rooted in economic structures, social policies, and cultural attitudes. Labor markets in many European countries are less flexible than in the US, and the recent energy crisis has been more acute for European consumers. Moreover, while US households often rely on credit to sustain spending, Europeans depend more on actual income and savings, which leads to a faster drop in consumption when confidence falls. American consumers are more resilient to confidence fluctuations due to structural differences, from more flexible labor markets to the wealth effects that buffer swings in sentiment and spending. Increased sensitivity among European consumers is reflected in sharper swings in consumer sentiment and a stronger impact of confidence changes on spending behavior compared to the US. Confidence shocks appear to explain a larger portion of retail sales fluctuations in Europe (from 9% in Germany to nearly 18% in the UK). In the US, confidence shocks account for only 7% of retail sales fluctuations. In this context, stabilizing consumer confidence will be key to supporting growth in Europe. However, caution is needed regarding higher tariffs, which could weigh on spending among US consumers, especially lower-income households. A return of Donald Trump could spark a new trade war, marked by targeted and significant tariff hikes on imported goods, especially from China (up to 60%).
Tariff Disputes Will Not Be Cost-Free. China remains a major supplier of electrical and electronic machinery (14% of total US imports in 2022, including 31% from China), mechanical machines and equipment (15% / 25%), textiles (5% / 34%), toys and recreational goods (2% / 78%), furniture (2% / 42%), and plastics (3% / 30%). Higher tariffs on Chinese imports would drive up prices in the US, hitting low-income households the hardest. Studies by the Peterson Institute for International Economics suggest that tariffs could lead to a 6% (USD 2,600) income reduction for the lowest-income quintile of US households, twice as much as for higher-income households in the top quintile (-3% / USD 1,200). The National Retail Federation estimated cost increases of USD 360-625 per year for the average US consumer for six products whose production costs are heavily reliant on China (clothing, toys, furniture, home appliances, shoes, and travel goods).
Retailers Adjusting to Inflation and Supply Chain Challenges
Producer/Supplier Pricing Power Diminishing. Both manufacturing firms and retailers in the US and Europe have less pricing power as consumers and businesses increasingly resist higher prices amid slowing demand and the persistent effects of recent inflationary pressures. This shift marks a turning point for many companies that relied on price hikes during the post-pandemic period to offset rising input costs and maintain margins. Both regions are witnessing the convergence of several factors – cooling economic growth, still-high interest rates, increased consumer price sensitivity, and declining confidence – which reduce the ability of businesses to pass on costs to customers. In the US, where inflation has fallen from its peak in 2022, disposable income remains under pressure from high housing, food, and healthcare costs. As a result, consumers are increasingly opting for cheaper alternatives. An increasing share of retail trade is reporting growing demand for private-label goods, indicating a lesser willingness to absorb price increases for branded products. The recent stabilization of supply chains has also diminished the pricing leverage that producers had during the supply shocks of 2021 and 2022.
According to Allianz Trade’s analysis, European companies face the greatest challenges in maintaining their prices. Consumers in Europe are still struggling with high energy costs and food price inflation, making them particularly price-sensitive, as reflected in weak retail sales growth in major economies such as Germany and France. Our analysis of recent trends in retail and producer prices reveals that in most product categories, producer prices have been rising faster than retail prices. This confirms the waning pricing power of both producers and retailers. In conclusion, the decline in pricing power reflects a broader normalization of economic conditions post-pandemic. As inflation decreases and consumer demand weakens, companies in the US and Europe are entering a phase where price hikes are no longer an easy lever to sustain growth, marking the beginning of tougher operational conditions.
Profitability Under Pressure. With declining demand and ongoing inflation, retailers in the US and Europe are facing significant slowdowns in profitability growth in Q3 2024. While many companies saw strong sales growth during the post-pandemic recovery, capitalizing on pent-up demand, the landscape has significantly shifted in 2024, and profitability is now under pressure in key markets. In Q3 2024, global diversified retailers and e-commerce players managed to increase profitability by +8.5% YoY and +9.1%, respectively.
In the food retail sector, profitability declined by -6.5% YoY, following a year of strong growth, where rising prices offset declining volumes, a trend no longer holding in the US or Europe. Specialty retailers reported flat profitability on a YoY basis. In the short term, nearly all segments saw negative profitability growth on a quarterly basis.
Adapting Inventory to Supply Chain Disruptions and Rising Costs. Retailers in the US and Europe are strategically increasing inventories to address the dual challenge of inflation and supply chain disruptions. While the retail sector maintained inventory levels averaging 46 days of turnover in the four years prior to the pandemic, this has risen to 54 days of turnover since the onset of COVID-19. By purchasing in advance, companies aim to hedge against rising prices and mitigate the risk of delays or shortages.
This inventory increase reflects a proactive response to the unstable conditions that have characterized global markets since the pandemic, as retailers strive to stabilize their operations in the still-uncertain environment. In the US, this trend has been particularly evident in sectors like clothing, electronics, and household goods, where margins are especially sensitive to supply price fluctuations. Reductions in shipment delays and lower freight rates in 2023 allowed many retailers to replenish stocks depleted during the pandemic, with the added benefit of protecting against further inflation.
However, this strategy is not without risks. Elevated inventory levels come with higher storage costs and the risk of tying up capital in excess stock in the event of slowing consumer demand. In fact, several large US retailers signaled difficulties with excessive inventory by the end of 2023, forcing them to adopt aggressive discounting strategies to clear shelves. Balancing adequate inventory levels while avoiding excess stock is becoming increasingly delicate and difficult to maintain. In Europe, inventory accumulation followed a similar pattern, though with additional complications. Eurozone retailers faced not only inflationary pressures but also ongoing geopolitical risks, such as the energy crisis exacerbated by the Russian-Ukrainian war. These factors increased concerns about supply chain reliability, prompting many companies to prioritize securing key goods well in advance.
Volume vs. Premium: Market Polarization Intensified by the COVID-19 Pandemic and Period of High Inflation. The widening wealth gap, which dramatically increased in developed economies during the COVID-19 pandemic and the period of double-digit inflation in 2022-2023, has influenced the operational strategies of retailers. As a result, two distinct business strategies have emerged, targeting two very different consumer categories: low-income and high-income households, as well as younger and older demographic groups. Low-income consumers are particularly sensitive not only to price but also to delivery speed and quality, as higher energy costs force them to manage purchases more efficiently (i.e., avoiding unnecessary trips).
To attract such customers, some large retailers have widely implemented large discounting policies, lowering prices to increase foot traffic (volume-based strategy) while also simultaneously developing digital services to enhance customer engagement and brand loyalty. As part of this strategy, retailers have also expanded their product assortment by further developing private-label goods, whose perceived value has significantly increased in recent years, making them a true alternative to branded products. This has allowed these retailers to maintain high margins despite lower prices.
On the other end of the spectrum, we see retailers who have opted to position themselves around high-quality and health-oriented products, as wealthier customers are less likely to cut back on spending. This social group is much more sensitive to value than price and is willing to pay more for something that either satisfies them (pleasure effect), convinces them it’s good for their health, or makes them feel it was specially designed for them (personalization). To meet their increasingly higher expectations and demands for personalized products/services, some retailers are exploring technological tools, particularly AI-based platforms, learning bots, and/or Big Data software, to better detect and understand customer needs.
Consumers Are More Digital, but Not More Responsible
Organic Food and Responsible Products: Have We Reached a Ceiling, or Is There a Post-Purchasing Power Crisis Hit? The organic food market and other consumer trends focused on sustainability are facing significant challenges in the US and Europe as the ongoing purchasing power crisis shifts spending priorities, leading many consumers to abandon expensive eco-friendly products in favor of more affordable conventional alternatives. This shift threatens the consumption dynamics centered around sustainability that had been growing in the years leading up to the economic slowdown. In the US, the organic food market, which had been growing at double-digit rates for much of the last decade, is now slowing down. High inflation has exacerbated this trend, with key products like meat, eggs, milk, and other foods seeing sharp price increases. In Europe, where the organic sector has long benefited from government subsidies and strong consumer demand for sustainable goods, the situation is similar. Organic food sales in Germany, France, and Italy have seen significant slowdowns. Beyond food, other consumer responsibility trends, such as sustainable fashion and eco-friendly household products, are also facing difficulties. In both regions, the emphasis on more eco-friendly consumption is encountering resistance as consumers focus on meeting their immediate financial needs rather than supporting long-term sustainability goals and preferences. For example, slow fashion brands, which promote ethical labor practices and environmentally friendly materials, have seen a decline in sales as consumers shift to “fast fashion” retailers in search of cheaper options. A challenge for retailers and manufacturers will be rejuvenating these segments and products once the purchasing power crisis is viewed as a thing of the past.
E-commerce Continues to Grow, Driven by Non-Essential Products. The e-commerce market has nearly doubled in size since the start of the COVID-19 pandemic and is expected to exceed $4 trillion in 2024. It is projected to reach about $6.5 trillion by 2029, growing at a compound annual growth rate (CAGR) of +9.5% over the next five years, although this is slower growth than the +13.5% CAGR seen in the previous five years. This significant growth is still driven by two dominant players: China, which accounts for 36% of global e-commerce revenue, and the US, with a share of 30%. This dominance is primarily attributed to high internet penetration, as studies consistently show a strong correlation between internet access and online shopping. However, a more decisive factor is the advantage of large e-commerce platforms in these countries, such as Alibaba and Amazon, which serve a diverse range of customers in terms of social, age, and demographic factors. In Europe, a similar pattern is observed, though on a smaller scale. The UK leads the region with 19% of European e-commerce revenue (equivalent to a 3% share of global e-commerce), followed by Germany with 15% (2% globally). However, Europe as a whole remains far behind, generating only 15% of global e-commerce revenue, and this share is unlikely to grow, remaining steady until 2029. These poor results are largely due to the absence of major e-commerce platforms comparable to those in China or the US, and slower digital technology adoption, influenced by regional consumer habits. Europe’s fragmented markets and varying levels of digital maturity among consumers in different countries have further hindered its ability to capitalize on the e-commerce boom.
At the sector level, non-discretionary products – such as food, beverages, tobacco, and basic household items – are expected to see the greatest growth potential, with online revenue growth forecast to exceed +10% CAGR over the next five years. This growth stems from relatively low digital penetration in these categories, creating significant room for growth as e-commerce solutions for these products mature. On the other hand, categories such as personal hygiene, DIY and tools, and pharmaceuticals are expected to see significant deceleration in revenue growth compared to the last five years, as much of the online demand in these sectors was driven by the pandemic. Meanwhile, sectors like electronics and media are expected to continue strong growth, with projected CAGRs of +9% and +8%, respectively. This sustained growth is likely driven by the natural product replacement cycle for items purchased during the pandemic, such as computers, audio equipment, and other media devices, which are nearing obsolescence.
Digital Technology Creates New Competition. Social media platforms are increasingly driving sales. Social media revenues (i.e., the portion of online sales generated through social platforms) have surged in recent years, especially in markets like China and India. In these countries, the share of social services revenues to total e-commerce revenues tripled between 2018 and 2023, reflecting the rapid impact of social media sales on consumer purchasing habits. Although this segment remains relatively small in the US and Europe compared to these markets, it is steadily gaining in popularity, driven by younger consumers, particularly Generation Z. This digitally native cohort spends a lot of time on social platforms and increasingly relies on them for product discovery and brand interactions. Unlike older generations, Generation Z is less accustomed to in-store shopping and shows lower brand loyalty, making social platforms a key way for retailers to capture their attention. These platforms serve both as marketing tools and sales channels, enabling companies to showcase products, engage with potential customers, and convert engagement into sales. For retailers, the growth of social commerce offers an additional, yet distinct opportunity to increase their online presence and drive revenues.
Social platforms offer unique benefits, such as targeted advertising, influencer partnerships, and real-time consumer engagement, which can boost brand visibility and conversion among tech-savvy audiences. However, this approach also presents challenges, including higher marketing costs, as companies invest in sponsored posts, content creation, and platform-specific campaigns to remain competitive. These added costs can be risky for profit margins, especially if the expected sales do not materialize. While
the potential for capturing new revenue streams is significant, margin pressure and uncertainty around social commerce require both careful strategy and execution. Additionally, social media sales allow for further development of direct sales channels, offering existing and emerging brands the opportunity to serve customers directly, without the need for intermediaries.
There’s Also a Technological Dividend for Retailers.
Why are consumers using the Internet at all? The growth of digital offerings seems to be an unofficial must-have option for retailers to increase revenues, maintain high margins, and even capture market share. However, digitization, already underway or planned by some retailers, is not straightforward. It involves not only designing a user-friendly platform to increase traffic but also deeply transforming supply chains and inventory management to ensure effective cost optimization. There are three key factors driving customers to shop online instead of visiting stores: 1) speed and reliability of delivery, 2) security and diversity of payment solutions, and 3) price competitiveness. The ability to get whatever we want quickly, at lower costs, and in a reliable and secure manner seems like a huge upgrade for customers. Checking all these boxes could give a company a crucial competitive advantage. However, loyalty still depends on reliability, so the greatest challenge for a company is ensuring it has a dynamic supply chain and effective inventory policies to avoid shortages and ensure timely delivery to customers. Increasing flexibility is key to success for retailers, and leveraging technology is often a means to achieve this goal. This explains the rising investments in automation, big data, and AI tools.
AI Dorado: Artificial intelligence and machine learning can bring significant benefits. The retail sector is still in the early stages of developing AI-driven solutions. However, we are already seeing that retailers are increasingly turning to AI technology to enhance operational efficiency, improve customer engagement, and boost profitability. For example, US retailers planning to implement AI hope it will impact various applications. Marketing automation is a leader in this area, with 49% of retailers planning to use AI for this purpose, reflecting its critical role in personalizing customer outreach and optimizing campaigns. By analyzing real-time customer data, AI-powered marketing tools help retailers deliver tailored advertisements, promotions, and recommendations, thereby improving conversion rates and customer retention.
Virtual agents and chatbots, cited by 31% of retailers, are the second most popular AI application, highlighting the demand for better customer service. These tools allow retailers to provide 24/7 support, handle routine inquiries, and reduce or free up human staff. AI-powered data analytics, mentioned by 29% of retailers, is crucial for decision-making and operational efficiency. Advanced analytics enables companies to predict demand, optimize inventory levels, and identify emerging consumer trends. For example, retailers can use AI to analyze historical sales data along with external factors such as weather or economic indicators, improving forecasting accuracy and reducing the risk of overstocking or stockouts. More advanced technologies, such as voice recognition (12%), robotics process automation (5%), and biometrics (3%), are less frequently mentioned but show promise in niche applications. Among the main changes planned by those implementing AI in their businesses, training is the top response (34%), as employees need to familiarize themselves with new tools and technologies. There is also a significant percentage of respondents who have no concrete plans because they view these tools as “plug-and-play” or have not strategically thought through their AI implementation. Overall, due to their potential to generate higher revenues and reduce costs, it is expected that retailers using AI and machine learning will increase sales twice as fast as those who do not. The same dynamics apply to profitability growth.
