NEW YORK — US retail and restaurant sales stand to inch up next year, as high prices and financial pressures will lead many consumers to scale back discretionary purchases in favor of spending on essentials, according to Fitch Ratings.

In its US Retail & Restaurants Outlook 2025 report, Fitch pegged the sector’s revenue growth at 1.8% for 2025, up from a projected 1.1% increase for 2024. Those growth levels remain well below retail and restaurant revenue gains of 3.4% in 2023 and 10.8% in 2022 — driven in part by higher inflation — but look to pick up slightly in 2026, for which the New York-based credit rating agency forecasts a 2.2% uptick.

“Fitch expects growth in staples categories to outpace still-challenged discretionary goods trends, yielding flattish to slightly positive overall US retail sales in 2025,” said David Silverman, senior director at Fitch Ratings.

Prices remain high

Elevated prices still weigh heavily on consumers, Fitch noted. In the year to date through August 2024, retail sales (excluding gasoline and auto) were 37.9% higher than in the same period in 2019. That percentage also was up from 2023, when retail sales were 35.5% higher versus the pre-pandemic period.

At grocery stores, year-to-date sales through August 2024 were 28.7% higher than they were in 2019, up from a 27.8% difference for 2023. Other retail sectors with big sales differentials versus the pre-pandemic period were general merchandise (26.3% higher as of August 2024), health and personal care (28.4%), gas (25.1%), home improvement (30.5%), auto and auto parts (29.3%) and apparel (15.9%).

“While consumer health remains strong, Fitch projects that inflation, lower savings levels, and shifts toward spending on experiences and services will temper discretionary goods spending,” Fitch said in the report.

However, 2025 could mark a year of transition for retailing as the nation sees the effects of the pandemic wane, according to Fitch’s outlook.

“Retail sales in 2025 could see some overall normalization following a volatile five-year period,” the report said. “The pandemic affected consumer health, consumer spending behaviors and supply chains. While some impacts of the past half-decade will linger into 2025, Fitch expects much of the recent volatility to dissipate. Consumers will return to longer-term trends, such as the quest for value and a focus on experiences like travel and dining out, rather than goods.”

Staples categories should see modest retail volume growth in 2025, Fitch said, adding that discretionary categories will exhibit variability in volume “as consumers assess their financial and spending opportunities across goods and services.”

“Sales performance will vary by category,” the report said. “Segments like home improvement, home furnishings and apparel will show weaker results compared to staples categories like food and personal care. Fitch expects retailers with a strong suite of assets to gain market share. These assets include robust supply chain infrastructure, a well-maintained store network, effective e-commerce platforms, healthy cash flow generation for new investments and good differentiation to inspire customer loyalty. A well-articulated value position, including price or service, is also critical.”

Restaurants grapple with “menu fatigue”

In the restaurant/foodservice space, Fitch projects food-away-from-home spending to edge up by low single digits in 2025, down from mid-single-digit growth in 2024, in line with likely softer consumer spending.

The away-from-home channel still accounts for slightly over half of overall US food spending, but sales growth in that segment and in food-at-home have generally leveled off since this past spring, Fitch and federal data show.

“Traffic is projected to remain flat or modestly decline because of pressures from cumulative inflation, a cooling labor market and moderated real wage growth, all of which are likely to weigh on consumers’ choices about dining out,” Fitch observed. “Volumes will continue to be supported by favorable menu mixes as well as operational improvements through technological investments and innovations that enhance value and drive add-on sales opportunities. Average check growth is expected to align with inflation.”

Restaurants hit by “menu price fatigue” will continue to be challenged next year as consumers opt for less expensive meal options and rely more on promotions, Fitch noted.

“Fitch expects quick-service restaurant (QSR) volume to outperform full-service restaurants, as lower discretionary consumer spending results in reduced traffic,” the report said. “Restaurants with outstanding customer service, a strong value proposition and high-quality experience gain market share and are likely to perform better, with stable to increased traffic.”

Modest economic growth expected

Looking at the broader economy, Fitch projects 1.6% growth in US gross domestic product for 2025, which the ratings agency described as “modestly lower” than the 2.5% growth estimated for 2024 but essentially in line with the roughly 2% five-year average.

Consumer spending, meanwhile, is forecast to rise 1.4% next year, a level that Fitch called “modestly below” its 2024 projections and “slightly below” the five-year average.

“Fitch attributes spending growth forecasts to a slight uptick in unemployment and modest downtick in inflation and interest rates,” the outlook report said.

“Home-related categories, consumer electronics, used vehicles and apparel are likely to face continued headwinds,” Fitch said. “Beauty and new vehicles are projected to grow, with the latter largely due to improving supply. Expressions of value and strong omnichannel features will continue to drive market share differentiation.”

Retailers, though, may see a business climate more conducive to growth-focused strategies, Fitch pointed out.

“Operating margins improved in 2024 as supply chain challenges dissipated and cost inflation subsided,” the report said. “Margins are generally expected to remain flat across the space. Many retailers will seek opportunities to reinvest savings from cost-reduction programs and automation efforts into revenue-driving initiatives.”

Post-election changes

Policy shifts by the incoming Trump administration and new Congress could bring some disruption, and some benefits, to the retail and restaurant sector in 2025, Fitch posited in its report.

“After the 2024 election, significant changes are likely to occur in tariffs, taxation, immigration and health care,” the ratings agency said. “Increased tariffs in imports could raise the cost of business across retail, especially in consumer electronics and value-oriented consumer discretionary goods such as home furnishings and gifting items. Conversely, efforts to reduce tax rates could yield higher take-home pay for consumers and potentially stimulate demand for goods.”

Besides more tariffs, potential changes to immigration and health care policy have been key concerns of employers and consumers both during and after the campaign.

“Deportation programs that reduce the immigrant population in the US could impact the labor market and overall consumption levels,” Fitch said. “Changes in health care legislation could affect health care availability and cost burden for individuals, which could alter overall household budgets.”

Businesses also will be watching for changes in the regulatory environment under the new administration, Fitch said, citing the market for mergers and acquisitions and deals such as The Kroger Co.’s planned acquisition of rival grocer Albertsons Cos. Under the Biden administration, Federal Trade Commission chair Lina Khan has cracked down on large M&A transactions, and the tougher policy stance has stalled the Kroger-Albertsons merger in the courts.

“Retailers who consider M&A must address potential divestitures or other remediation proposals to resolve possible concerns around market share concentration generally, or in key markets or geographies,” Fitch’s outlook report said. “Fitch recognizes that regulatory oversight could ease at the start of 2025 due to the new presidential administration.”