Share sector review – retail

The retail sector covers a wide range of businesses selling goods and services directly to consumers, often in stores or online. Retailers typically don’t create the products they sell. Instead, they buy from a wide range of manufacturers or wholesalers and sell to customers from a single, easy-to-access place, adding a markup.

The sector is cyclical, meaning demand for products typically fluctuates alongside the health of the broader economy. But keep in mind that a wide range of companies fall under the retail umbrella, and some are more sensitive to consumers’ discretionary spending than others. That means there’s no one-size-fits-all approach to assessing risks and opportunities, but there are some common themes to watch out for.

This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest. Ratios also shouldn’t be looked at on their own.

Key drivers in the retail sector

This is the primary driver for the retail sector. That’s influenced by employment levels, wage growth, inflation and interest rates, which all influence how much discretionary income households have.

When incomes and employment are rising, and inflation is manageable, consumers tend to spend more at retailers. But the opposite is also true.

E-commerce continues to reshape the retailing landscape. The pandemic accelerated the shift of sales online. But even as footfall has returned to stores, online retail remains a structural growth trend across the globe.

Retailers with strong online platforms, efficient logistics, and good online experiences for customers are best placed to benefit from this.

These also matter. Retail is a highly competitive space, with companies constantly trying to differentiate themselves through price, convenience, product selection, and customer experience.

Retailers that can keep customers loyal by offering unique products or creating attractive in-store and online experiences can defend pricing and maintain healthier margins.

Retail sector performance

The retail sector has underperformed the market in recent years, and 2025 was no exception. But performance has been mixed across the sector.

Many food retailers have generally held up well in recent times. Consumers still need to eat, regardless of the broader economic picture, so they’re willing to cut back in other areas of retail before drastically reducing the number of items in their weekly shop. That leads to relatively steady demand and cash flows, making groceries one of the more defensive areas of retail.

More discretionary retailers, like those in the fashion, home goods and electronics space, have faced tougher times. Pressures on household budgets have caused many consumers to delay or cut back on non-essential purchases. That’s generally led to softer volumes and weaker margins, which businesses are having to try and offset through cost-cutting and efficiency gains.

Looking to 2026, if the recent spike in oil prices persists, it could bring a handful of challenges for the retail sector. The additional inflationary burden is a headwind for profitability, and has also raised uncertainty around the direction of interest rates this year. If they move higher, it would increase borrowing costs for households, leaving less money available for everyday and discretionary retail purchases.

Key opportunities in the retail sector

Despite recent challenges, there are a handful of structural and cyclical trends looking positive for the sector.

This is one example. While online penetration is relatively mature in the UK, retailers with fast and efficient fulfilment networks, as well as strong use of data and artificial intelligence (AI) to present the right items to customers, can still capture market share. Executing well here can bring both sales and margin benefits.

Overseas markets bring exciting growth opportunities. Developing markets typically have lower online penetration than in the UK, offering a vast new revenue stream if retailers can execute overseas expansion well.

This has been in positive territory for some time, meaning pay has been rising faster than inflation. That’s allowed strong players to drive volume growth without aggressive discounting. Economic trends could see this tailwind fade, but relatively high household savings levels should provide some cushion.

These have been a key theme across the sector as legacy stores look for ways to bolster their bottom line. Profit margins in the sector are typically thin, meaning eliminating unnecessary expenses can have an outsized impact. We still think there’s room for improvement, particularly for those investing in more automation, supply chain improvements, and smarter inventory management systems.

Key risks in the retail sector

Despite the positives, there are some issues that could weigh on the retail sector.

This remains relatively low. Although inflation has eased, the pace of real wage growth and interest rate cuts will continue to shape consumers’ disposable income.

Retailers selling discretionary goods like clothing or big-ticket items are most exposed if consumers remain cautious. Food retailers are a little more insulated if the outlook deteriorates, given that food is a necessity.

This is another key risk to be aware of. Retail is typically a low-margin business, so even small cost increases can significantly weigh on profitability. Higher minimum wages increase labour costs, making it more expensive to run stores.

Global conflicts also have the potential to increase freight and fuel costs, which might not be fully passed on to customers. If retailers can’t offset these higher costs through pricing or efficiency improvements, then profitability will come under pressure.

Competition in the sector remains intense. Discounting has historically increased during periods of weak demand, to drive sales. But this often leads to a squeeze on margins and profits.

Retailers lacking brand differentiation or scale may struggle to maintain their pricing power and are most at risk if broader economic conditions deteriorate.

Our view on the retail sector

Overall, our view remains mixed, and selectivity is key.

Food retail is a more defensive space if conditions get tougher, supported by steady demand and the ability to drive volume and market share growth through scale and competitive pricing. These businesses typically offer more robust cash flows and less earnings volatility.

In non-food retail (discretionary), we think the outlook is more challenging in the near term due to weak consumer sentiment. Within this bucket, there are still names that we like. These tend to be the leading companies in their field, with clear brand strength, strong digital capabilities and disciplined cost controls.

Retailers that can differentiate on product and customer experience, rather than purely on price, are better positioned to weather any potential future storm and capture market share as conditions stabilise.

Environmental, social and governance (ESG) risk

The retail industry presents low to medium ESG risk, varying by subsector. Online retailers face higher risk due to increased transparency requirements, which heighten scrutiny of supply chains and data privacy. Retailers with Asia-Pacific exposure are more vulnerable to human rights risks, particularly in sourcing and manufacturing.

So, supply chain integrity and labour standards are key risk drivers to the retail sector, alongside product quality and safety, broader societal and environmental impacts, and data privacy and security. Cyber risks are a growing concern, with several high-profile attacks leading to operational disruption, financial losses and reputational damage.

Multi-tiered supply chains further increase exposure to environmental and human rights risks, particularly when upstream supplier visibility is limited and regulatory standards vary by region. As regulations tighten in markets like the US and Europe, companies face higher due diligence requirements and potential supplier restrictions.

Retail sector companies we provide research on

• ASOS

• Associated British Foods

• Boohoo

• Greggs

• JD Sports Fashion

• Marks & Spencer

• Next

• Ocado

• J Sainsbury

• Tesco

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss. Yields are variable and not guaranteed.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.