UK retailers brace for tax headwinds as Christmas demand shows pockets of resilience

Retailers and pub groups warned that higher taxes and looming regulation could dampen consumer spending as the Budget approaches, even as some indicators point to continued vibrancy among wealthier shoppers and a potential Christmas bounce.

Executives at Next and JD Wetherspoon – two signals of Britain’s high street health – joined a chorus of caution this week, arguing that tax increases and a stricter policy environment threaten discretionary spend. Other recent calls to tighten the screws on households came from AO World, JD Sports and Mitchells & Butler, the pub operator behind All Bar One and Harvester, who all signalled worsening conditions for their sectors.

Retailers’ caution sits against a backdrop of softening consumer outlays. Bank of England Governor Andrew Bailey noted data showing families are trimming nonessential purchases, with retail sales slipping for the 12th month in a row. Investors face a tricky question: are retail and hospitality stocks now best avoided, or could they still offer resilience for investors who pick the right beneficiaries of a constrained consumer?

Yet the picture is not uniformly bleak. Affluent consumers appear more insulated from the headwinds and some festive indicators have surprised on the upside. John Lewis reported that sales of certain retro-style Christmas tree baubles were up 293% versus 2024, while Marks & Spencer said festive food orders were 8% higher than last year. In parallel, Kingfisher – owner of B&Q and Screwfix – reported better-than-anticipated first-half results, helped in part by lower mortgage rates encouraging spending on home renovations. In the equity market, however, some investors who bet against Kingfisher have been left downbeat about the outlook for the sector.

Given the divergences in the sector, analysts and fund managers say selective exposure may be warranted. Brendan Gulston, joint manager of WS Gresham House UK Multi Cap Income, argued that well-run businesses with scale, brand strength and efficiency are positioned to take market share as the environment tightens. That theme is echoed in broker notes: many see Next, a £14.9 billion bellwether for the High Street, as likely to hold up better than peers, thanks to pricing power and a stronger online presence, even as the store group warns of an anaemic growth backdrop driven by higher taxes and regulatory pressures.

A prolonged tax burden remains a through-line in the debate. Lord Wolfson, chief executive of Next, warned of a weak growth trajectory shaped in part by a rising tax burden that could undermine productivity. He also warned that the Employment Rights Bill could affect the jobs market, potentially lowering consumer confidence and shopping activity. Sir Tim Martin, chief executive of JD Wetherspoon, has been vocal about the impact of value-added tax on pubs; he notes that VAT on food at pubs (20%) makes eating out less price-competitive relative to supermarkets that do not apply VAT on food. He is expected to be more vocal again as the sector reports its results, even after a forecast bounce in like-for-like sales of around 5%.

In the market, sentiment is nuanced. Next’s shares have advanced about 26% so far this year, despite the cautious tone, with full-year pre-tax profits expected to rise about 9% and full-price sales up around 11% in its own stores and online. Analysts remain split on near-term directions, with roughly half rating the stock a hold or a buy, and one notable broker, UBS, projecting a potential upside to around 14,500p. Wetherspoon’s shares have climbed roughly 12% this year as the chain benefits from summer demand and a relatively attractive valuation, though the sector’s longer-term prognosis under a tougher tax regime remains contested. Analysts broadly advise holding, with most targets in a narrow range.

The broader retail and home-improvement complex has delivered a mixed bag of signals. Kingfisher, which also operates Castorama in France, posted a robust first half that refocused attention on the resilience of home refurbishment demand as mortgage rates eased. Berenberg subsequently raised its price target on the stock, though most analysts still rate it a hold in the face of sector-wide headwinds. Mitchells & Butler, the All Bar One and Harvester owner, reported solid first-half numbers, reinforcing the view that some hospitality operators are weathering the tax regime tighter than others.

The set of opportunities named by market watchers runs through value forecasters and niche plays. Moonpig, a greeting cards company, is singled out by Brendan Gulston as a stock with upside potential thanks to their data assets and ability to monetize consumer insights. Angling Direct, the fishing-tackle retailer, has also drawn attention for a potential rebound, with analysts rating the stock a buy on the back of a recent share-price recovery. B&M, the discount retailer, has faced a tougher year but remains a target for those who see a turn in fortunes under new leadership and a more favorable cost base. JD Sports, after a year of volatility, is viewed by some investors as a long-term recovery play if demand for athletic footwear stabilizes.

In terms of what to watch, some fund selectors emphasize the value of consumer-discretionary allocations within England’s stock universe. Artemis UK Select and VT Tyndall Unconstrained UK Income are among funds highlighted by observers for holding blends of consumer exposure that include JD Sports and related names, with a view to balancing cyclical and structurally resilient franchises. Several DIY investing platforms continue to advertise access to a broad array of consumer stocks, signaling ongoing investor appetite for direct exposure to the sector.

As the Budget looms, analysts say the tug-of-war between headwinds from taxes and regulation and pockets of resilient demand will define performance across the sector in the near term. The narrative that emerges is not one of uniform decline but rather a bifurcated landscape where well-capitalized, efficiency-driven retailers and hospitality groups can hold the line, while highly leveraged or structurally disrupted players face increasing pressure. The degree to which policy choices can be tailored to cushion consumer confidence may determine which stocks can outperform in 2025. With Christmas and the holiday season looming, investors are watching closely to see which brands can translate resilience into sustainable profit and which will be left on the sidelines.

Some of the most-told stories from the past week center on the fragility of consumer confidence in a higher-tax environment. The Bank of England’s latest retail data, together with corporate updates from Next, Wetherspoon and Kingfisher, underscore the uneven texture of the current market. While higher taxes weigh on discretionary avenues like clothing and dining out, improvements in mortgage affordability and the continued strength of home improvement categories offer a counterweight for specific segments. Analysts stress that the right stock pick—those with pricing power, efficient cost structures and the ability to capture share in less elastic markets—may still offer attractive returns in a challenging macro backdrop.

Mid-article, with a nod to the ongoing debate about where to place emphasis for capital allocation, investors and corporate leaders alike will be watching for the Government’s Budget details. As policy direction becomes clearer, traders expect to recalibrate portfolios toward names that can endure through tax increases and regulatory changes while continuing to capture demand from households that maintain a willingness to spend on experiences, fashion, and improvements to the home.

In the hospitality segment, the high-profile calls for VAT reform and a more favorable tax framework for pubs highlight a central tension. Wetherspoon and other operators argue that pricing power in leisure and dining remains constrained by fiscal policy, while the broader consumer remains cautious about big-ticket discretionary purchases. Yet on the consumer side, the more affluent segments are demonstrating a continued appetite for holidays, nights out and home improvements, a dynamic that could support a subset of discretionary retailers and hospitality operators.

Looking to the longer horizon, some market observers suggest that the sector’s winners will be those that can translate brand strength into durable earnings growth, rather than relying on cyclical bounce alone. Moonpig and Angling Direct are presented as potential beneficiaries of more detailed customer data and efficient digital-to-offline strategies, while B&M’s revival hinges on execution under new leadership and the ability to demonstrate continued value for cash-conscious shoppers. The mix of earnings resilience and market optimism surrounding selective players points to a market in which bottom-up stock picking could outperform broad indices.

Investors should remain mindful that the broader macro environment, including tax policy and labour-market regulations, will influence consumer behavior well into 2025. While some segments appear able to withstand higher prices and a tighter policy framework, others are more exposed to the cost-of-living squeeze. As companies report results and analysts update their models, the balance between cyclical headwinds and secular growth opportunities will shape the sector’s trajectory in the coming quarters.