Are retail CEOs pessimistic? Cautiously optimistic? Or just realistic?

This could be a worrying bellwether for the outlook over the coming year, especially when the CEO Confidence Index correlates to corporate confidence and a high degree of faith in the ability of their company to deliver. In short, leaders that invest in bold, proactive strategies and pursue high-reward opportunities will foster growth and value creation.

But retailers have much to be optimistic about. The market capitalization of leading retailers has improved threefold over the course of a decade marked by disruption and insecurity, with technology and innovation offering many new growth opportunities going forward. If the glass is half empty for retail leaders, then it is also half full.

1.  The glass half empty

Retailers have navigated disruption before, and they will have to do so again. Compared to CEOs in other industries, retail leaders seem to exhibit less optimism across various business areas, with cost, profitability, competition, talent and M&A all singled out as areas where retail optimism seems to be thinnest on the ground. What’s driving the pessimism? Firstly, retail has borne the brunt of many of the crises and disruptions faced by the global economy over the last few years from store closures during COVID-19 to stock shortages and price hikes resulting from geopolitical and supply chain disruption. Perhaps understandably, when it comes to the year ahead, retailers are tempering their optimism.

But more fundamentally the retail sector feels the economic and political realities faced by the world most acutely. Many sectors may be anticipating a bright future, but the outlook at a macroeconomic level is certainly murkier. Improving financial conditions cannot ignore the reality that expected global GDP growth of 2.7% will be well below the 3.1% achieved during the decade preceding 2020.

Against this economic backdrop comes political upheaval as well. Conflicts in Ukraine and the Middle East remain high on the geopolitical agenda and 2024 has seen national elections in countries accounting for 54% of the world’s population and 60% of its GDP. As new governments settle in and incumbents retrench, policymaking will accelerate, supply chains will shift to meet fresh trade mandates and consumers will adapt their behaviors around new political systems.

With this in mind, it’s unsurprising that retail leaders identified regulatory pressures (40%), supply chain pressures (43%) and changing customer expectations (40%) as the top three disruptive forces for the year ahead. In fact, retail leaders have greater visibility of geopolitical risk than companies in other sectors, with 88% of them claiming to have significant or full visibility of the geopolitical risks they face (compared with 76% of CEOs across all sectors). This may be why retail leaders do not feel that they are ahead of the curve, with just 26% of them believing their company is highly responsive to disruption (compared with 38% of CEOs across all sectors). Perhaps they are just more aware of how difficult the outlook is. 

If retail leaders are seeing this from a policymaking side, they are feeling it more acutely through the customers they serve. According to the July 2024 wave of the EY Future Consumer Index, which surveyed the feelings and intentions of over 23,000 consumers spanning 30 different countries:

• When asked about the rising cost of living, 55% of consumers are extremely concerned
• When asked about their national economy, 45% of consumers are extremely concerned
• When asked about foreign conflicts and wars, 41% of consumers are extremely concerned
• When asked about value for money in the future, 72% of consumers said they will be more focused on it

Only 54% of consumers are confident about the future and only 49% expect their economy to recover in the next 12 months. Based on this sentiment it seems as though retail leaders are more attuned to the expectations of their customers than companies in other sectors.

With lower expectations comes greater caution, and in retail this is influencing the strategic choices that leaders plan to make over the coming year. For example, rather than taking technology risks, 52% of retail leaders see developing strong business cases and ROI projections as an essential part of their investment strategy for disruptive technology. This is in strong contrast to other sectors, where 53% of leaders see rapid and systematic adoption of disruptive technologies as a priority.

Beyond this, appetite for M&A in retail remains muted. Just 24% of retail leaders expect to actively pursue M&A opportunities over the next 12 months, compared with 37% of CEOs across sectors. For retail selling assets seems to be a far more important priority, with over half (51%) of retail leaders actively looking at divestments and spinoffs in the coming year compared with 40% of their cross-sector peers.

2.  The glass half full

Retail has shown resilience and will continue to do so. If half of retail leaders are pessimistic about the coming year, then the other half are optimistic. In fact, cautious optimism, grounded in pragmatism, is the most accurate outlook for the sector.

Retail has been here before, many times. Over the last few decades it has faced down global financial crises, the rapid rise of e-commerce, the emergence of direct-to-consumer channels and repeated claims that it faced a retail apocalypse. Despite these, the market capitalization of the top 20 retail firms globally has risen from less than US$2 trillion a decade ago to almost US$6 trillion in 2024 with concentration among the top three retailers rising from 38% of the top 20 to over 50%. This threefold increase in valuation is 10 times greater than the rate of economic growth and three times the growth in valuation achieved by the top 20 consumer products companies over the same period, pointing toward the resilience of retailers in their ability to deliver long-term value creation to stakeholders.

This resilience is reflected among retailers today. Despite economic uncertainty, expectations of recession have failed to materialize. While prices remain high, both inflation and interest rates have been falling. Economic growth forecasts may be modest, but they have stabilized. Geopolitics remains a concern, but it is one that retailers are growing accustomed to living with. Progress in 2025 could lay a strong foundation to build more meaningfully for the future.

This future view is reflected by retail leaders, 37% of whom see significant value in reshaping their portfolio to reflect a deeper understanding of longer-term trends (compared with 35% of their peers across sectors). In fact, 28% of retail leaders believe that portfolio reviews are not aggressive enough because of complacency about the future, a view that only 24% of other CEOs share. Retail is emerging from a period where the operating environment has been dominated by cost-cutting, price sensitivity and managing performance metrics on a quarterly basis. Looking forward into the next year and beyond these pressures may be easing to unlock new ways to create value.

3.  Reasons to be cheerful

The optimism that retail leaders feel about tomorrow, ironically, may not lie in the way that they’ve done business for much of the last century. While the outlook for retail is less volatile than it has been over the last four years, sales will continue to reflect channel, category and supply chain trends that have been in place for decades. Typically this means slow, but steady, overall growth, with an underlying shift to digital and a continuous revision of assortment and operations. To unlock future value, retailers are scaling other opportunities. 

Three things that retailers can look forward to for future success:

1.  Building new growth capabilities from existing assets

Retail leaders have spent much of the last few years deconstructing their business for cost savings and efficiency gains. But they have also had time to reflect on new ways that they can create value.

Data from loyalty cards has driven a fresh wave of excitement and investment in retail media capabilities, but this is the just the beginning for a sector with such a large geographic and digital footprint. Physical store spaces, online platforms and established distribution networks all represent assets that retailers can utilize for new purposes. This is fueling growth in other B2B opportunities in areas such as logistics, marketplaces and branded pop ups.

Strategies in this space require an ecosystem of partners to deliver them. This means that while 51% of retail leaders are planning divestments in the coming year, 77% see themselves as already being proficient in building digital ecosystems that will move their business models from “competition” to “coopetition.” By taking a collaborative approach and driving new revenue streams from a variety of services retailers could see up to half of their profits come from alternative revenue sources such as advertising in the coming years.

2.  Expanding the scope and scale of private label

The shift toward private label is moving from something consumers did out of necessity, to something they are actively choosing, and retailers have been quick to take advantage. A recent survey by Nielsen IQ saw that 54% of retailers expect private label to be their number one growth driver in 2024 and this is likely to persist into 2025. Data from the Future Consumer Index shows that 48% of consumers no longer see brands as important in shaping purchase decisions and 66% believe that private label meets their needs as well as brands. This is giving retailers more permission to play in expanding private label lines to accommodate more premium categories, and more crucially, develop private label products that can shape more agile assortments.

While the CEO confidence index pointed to 45% of consumer products leaders assessing their portfolio quarterly or monthly, the number rises to 66% of retail leaders. This agility in revisiting and reshaping assortments through more agile private label suppliers could give retail leaders an edge in developing and launching new products that can compete on price, innovation, sustainability and quality.