UK retailers face tax policy headwinds as spending diverges across the market

Ahead of the Budget on November 26, executives at Next and JD Wetherspoon warned that higher taxes and tougher legislation threaten to curb consumer spending, underscoring a split in the UK High Street as policy debates intensify while retailers weigh how much demand could soften on the back of a rising tax burden.

Other retailers joined the caution line, including AO World, JD Sports and Mitchells & Butler, which said this week that tighter policy and higher costs could weigh on sales. Bank of England Governor Andrew Bailey highlighted data showing households are reining in spending, with retail sales down for the 12th consecutive month. Investors are weighing whether retail and hospitality equities are best avoided, even as some signals point to resilience among more affluent shoppers and a potentially busy holiday season. Fashionable High Street anchor Next has warned of anaemic growth as taxes bite, while John Lewis reported stronger early festive demand for some items. On the positive side, John Lewis said sales of retro-style Christmas tree baubles were up 293% on 2024, and Marks & Spencer reported festive food orders were already 8% higher than last year. Kingfisher returned better‑than‑expected first-half results, aided by a rebound in home renovations as mortgage rates eased.

The mixed signals have investors debating whether private consumption will hold up in the face of policy shifts. Hedge fund positions and sum-of-the-market concerns continue to surface, with some managers betting against Kingfisher now facing a more challenging backdrop for consumer-facing home improvement and DIY spending. Still, a subset of market participants argues that well‑run businesses with scale, brand strength and efficiency are well positioned to gain share during a downturn.

Despite the softer macro backdrop, some retailers report resilience in consumer pockets. Kingfisher’s stronger-than-expected first-half results suggested that households are continuing to spend on home makeovers, particularly in bathrooms and kitchens, supported by lower mortgage rates. The improvement has helped the retailer offset some weaker national consumer signals and prompted brokers to raise targets on the stock. Elsewhere, a handful of peers have reported firmer festive indicators: John Lewis flagged robust demand for certain seasonal items, while AO World and JD Sports noted ongoing challenges but with selective product demand holding up.

Next’s shares, while pulling back from earlier peaks, have still advanced about a quarter this year as the retailer maintains a view that full-year profits will rise, helped by strength in full-price sales. JD Wetherspoon, meanwhile, has benefited from summer demand and continued trading at a time when pubs face higher operating costs. Its shares have risen roughly 12% year to date, although the stock remains sensitive to VAT and regulatory developments that could alter the cost base for pubs and hospitality services.

Analysts continue to weigh the balance of risks and opportunities. For Next, consensus remains cautious but constructive: a mix of holds and buys, with a price target that reflects a belief the stock can sustain modest growth amid international expansion and resilient online sales. Wetherspoon also attracts a generally neutral to positive mix of ratings, with most analysts rating the shares as hold or buy and a minority seen as sells. UBS has highlighted expectations for a continued headwind from high street taxation, but notes potential upside from operational discipline and store efficiency. Some brokers have increased their price targets on Kingfisher after the better results, while others remain cautious until evidence of sustained demand in home improvement emerges.

UK consumer stocks remain in focus as investors reassess how much of the tax pull-through will land on discretionary spend. The government’s stance on VAT and taxation for hospitality and retail will continue to shape margins in pubs and department stores, while the Bank of England’s inflation trajectory and any retrenchment in mortgage rates will influence the pace of discretionary purchases into the key holiday season. In the near term, traders will be watching upcoming company results and guidance for clues about how broadly the Tory or Labour policy mix might affect consumer confidence and spending patterns.

Your opportunities for investors and fund managers feature a mix of traditional high-street names and niche retailers seen as having the potential to weather a tax-driven slowdown. Moonpig, a greeting-card and gifting platform, is highlighted as a potential buy on the basis of its rich customer data and targeted marketing capabilities. Angling Direct, a fishing-tackle retailer, is also rated a buy by several analysts, benefiting from a diversified product lineup and a small but growing online presence. B&M looks attractive to some buyers as a value-focused retailer with improving leadership and a refreshed store network, though some see limited upside given near-term macro headwinds. JD Sports, having faced a tougher year, is viewed as a longer-term rebound candidate if its strategy around running footwear and omni-channel growth begins to bear fruit. Some fund managers also flag the appeal of specialist or niche players in the discount and home improvement spaces as ways to capture value amid broader consumer weakness.

For investors seeking active management ideas, several funds and trusts are suggested by market observers. Artemis UK Select remains a vehicle with a 20% allocation to consumer discretionary stocks, and VT Tyndall Unconstrained UK Income includes JD Sports among its holdings. Platforms that curate investment ideas, such as AJ Bell, Hargreaves Lansdown, interactive investor and other digital brokers, are seen as helpful for constructing diversified exposure to these themes. The emphasis for many buyers remains on quality, scale, and the ability to manage through a tax-driven tightening of consumer spending while capitalizing on segments with durable demand and pricing power. Analysts caution that the near-term outlook is dominated by policy signals and macro data, and that stock picks should reflect a careful balance of defensiveness and growth opportunities.

In the longer run, investors may find pockets of resilience in brands with strong online platforms, omnichannel distribution, and pricing power grounded in differentiated products and services. The sector’s crosscurrents—policy changes, interest-rate trajectories, and shifting consumer preferences—will continue to shape the market as the Christmas season approaches and the Budget’s policy levers remain in focus.