Next PLC (LSE:NXT), B&M European Value Retail SA (LSE:BME) and Greggs PLC (LSE:GRG) announced an impressive set of results given the backdrop of a difficult market earlier today.
In the case of B&M and Greggs especially, there's evidence to suggest that the pair benefitted from consumer 'downtrading' - i.e. shopping more at the discount store, or, grabbing a sausage roll for lunch instead of a sit down meal.
Amidst the cost of living crisis its a simple narrative to grasp. Consumers are increasingly searching and shopping for better-value, it is a theme that's clear to see across the wider retail sector for at least the past year.
It is something that has been more evident among grocers, with Aldi snatching customers and displacing Morrison’s in the ‘big four.’
But, what can investors take from this trend?
For non-food retailers, the picture is slightly different.
Analysts believe consumers, at large, have cut back spending on discretionary items, although that isn’t to say there hasn’t been some trading down.
Much of the downtrading theme has been a response to inflation, which caused prices to spike and led consumers to seek more cost-effective alternatives or simply keep their money in their pockets.
Will consumer habits change should inflation fall?
“Inflation will go a long way to shaping consumer behaviour,” says Russ Mould, investment director at AJ Bell.
Office of National Statistics figures shows inflation at 9.3% for November, nudged slightly lower from 9.6% in October, and, experts reckon it will retreat further into 2023, eventually settling somewhere between 3% and 5%.
So, if inflation continues to fall as expected, will consumers revert to mid-range preference or will they be satisfied going forward with lower-priced alternatives?
Wrestling back customers is often easier said than done. For the non-food retailers, downtrading and cutting back on spending in the market is expected to continue, at least in the short term.
“For now, expect trading down to continue as living standards are likely to continue to deteriorate,” said Clive Black, retail analyst at Shore Capital.
Lower inflation should equate to higher consumer confidence levels, and, retailers will hope that means an uptick in discretionary spending.
For the grocers, conflicting food inflation data from the British Retail Consortium (BRC)/NielsenIQ and Kantar suggests the picture remains unclear.
The BRC and NielsenIQ data indicated food inflation continued an upwards trajectory, while Kantar suggests that the figure fell for the second consecutive month.
Analysts believe; however, downtrading will continue at least in the short term.
“Our experts suggest that there are still further pressures coming, particularly in food and beverage inflation as inflation in those categories continues to run higher than the average rate,” said Orwa Mohamed, a retail analyst at Third Bridge.
“Another wave of people will move across to discounters because you can genuinely save a lot of money,” he added.
Kantar data shows that Aldi and Lidl had been increasing their market share long before 2022, which would imply a fall in inflation shouldn't see them lose too many customers to competitors, and consumers will continue to 'switch' as opposed to 'downtrade' in the post soaring inflation market.
What to expect this month?
Next, B&M and Greggs results however might not be an indication of what to expect when the rest of the sector posts results this month.
While Next reported an increase in sales and moved its full-year profit forecasts higher by £20mln, the same might not be said for the rest of the fashion sector.
Data from JPMorgan suggests consumers likely cut back on spending on clothing in the run-up to Christmas.
JPMorgan also added that over the past two weeks, 58% of respondents it surveyed paid less for clothing as opposed to 15% who said they had paid more.
For ASOS, Burberry and Associated British Food owned Primark, all of which are reporting this month, it could turn out to be a quieter-than-hoped Christmas period.
For the grocers, Tesco, Sainsbury’s and M&S, consumers generally over-estimated their ability to speed less on food during Christmas, JPMorgan said.
Yesterday’s Kantar data suggests the grocers enjoyed a bumper Christmas, as they report in the coming days the market will find out more.
Spending in the four weeks to 25 December hit £12.8bn, breaking past the £12bn mark for the first time in any given 28-day period, albeit much of this due to rising costs of goods as opposed to greater volumes.
Will customers continue to downtrade?
For the grocery sector, Aldi and Lidl were pinching customers long before soaring inflation, so don't expect them to lose too many once the dust settles, with the likelihood being they continue to win more, just at a slower pace.
In the non-food space, spending will no doubt increase as consumer confidence levels rise.