Why Are So Many Retailers Struggling in Today’s Economy?

Retail is not standing still. Sales continue to grow; consumers are spending despite ongoing cost-of-living pressures and both physical and digital channels remain central to today’s commerce landscape. What has changed is not demand itself, but the conditions under which that demand exists and how difficult it has become to convert it into profitable growth.

UK retail sales volumes increased by 1.6% in Q1 2026 compared to the previous quarter, according to the ONS, showing continued activity across the market. Retail spending has also remained high in absolute terms, reaching around £9.4 billion per week in early 2026, reinforcing the scale of demand across the market.

But beneath that activity, the picture is changing quickly.

UK businesses in critical financial distress have risen by 36.9% year-on-year, while retail insolvencies remain elevated and store closures continue across the country. At the same time, the UK’s physical retail footprint is shrinking for the first time in decades, highlighting a structural shift across the sector.

This is the contradiction shaping the market today. Retail is growing, but it is becoming harder to turn that growth into profit.

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Why are retailers struggling?

Retailers are not struggling simply because customers have stopped buying. Demand remains, but it is more selective, more price-sensitive and more expensive to convert into profit.

Consumers are approaching spending with greater caution, prioritising value and delaying non-essential purchases. As a result, much of the growth seen across retail is increasingly driven by promotions and discounting rather than full-price demand, particularly in non-food categories.

At the same time, the cost of capturing that demand continues to rise across marketing, fulfilment and operations, meaning retailers are working harder and spending more to generate the same or lower levels of return. Labour costs are rising significantly, with industry estimates suggesting increases of over £5 billion annually driven by wage and employer contribution changes.
Fulfilment and delivery costs are also increasing, with 84% of ecommerce businesses reporting higher last-mile costs, many by more than 10% over the past year.
The result is a widening gap between revenue and profitability, where demand exists but is increasingly difficult to convert into sustainable margin.

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Complexity is turning economic pressure into a question on margins

Cost pressure alone does not explain the level of strain across the sector. The real issue is how that pressure interacts with complexity.

This has created flexibility in a growth market, but in a higher-cost environment it creates friction. More systems increase operating cost; fragmented data slows decision-making and duplicated processes reduce efficiency. Complexity is no longer just an operational challenge. It is a direct driver of margin erosion.

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Growth is no longer solving the problem

Historically, retail could rely on growth to absorb inefficiencies. That relationship has now broken down as cost inflation outpaces revenue growth.

The cost attached to each transaction has increased significantly. Delivery costs have risen for 84% of ecommerce businesses, while return rates in some sectors, particularly fashion, can reach 30% or more adding further pressure through reverse logistics and lost margin.

As a result, growth is no longer inherently profitable. Each additional order carries incremental cost across fulfilment, returns and service, meaning revenue can increase while overall margin declines.

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Why this is leading to more retail failures

The combination of rising labour costs, increasing fulfilment expenses and continued discounting is compressing margins across the sector, while access to capital has become more constrained.

At the same time, the contraction of physical retail space reinforces that this is a structural shift rather than a short-term fluctuation.

The result is a growing gap between revenue and profitability that many retailers are unable to absorb.

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What retailers need to change now

Retailers need to adapt their operating models to reflect a higher-cost, lower-margin environment. This means shifting focus from pure growth to how effectively that growth translates into profit, particularly across fulfilment, acquisition and operational efficiency.

Reducing complexity is central to this. Fragmented systems, duplicated processes and disconnected data increase cost and slow decision-making, making it harder to respond to changing demand and protect margin.

This shift is already underway. According to Barclays’ 2026 Retail Outlook, retailers are prioritising investment in technology, automation and operational efficiency to manage rising costs and remain competitive.

The priority is no longer just driving demand but operating profitably within it.

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How TCTG can help

TCTG works with retailers to simplify and optimise commerce operations, helping reduce complexity and improve profitability. If you are rethinking how your retail operations need to evolve, you can reach out at info@thecommerceteam.com or connect with us on LinkedIn.

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