UK retailers could see demand pick up again after a period of subdued activity across the industry, one leading analyst believes.
Shore Capital’s Clive Black pointed to DFS’s profit warning from last week as key evidence of a downturn in demand this year so far, echoing similar feelings from groups like B&M, B&Q, Halfords and JD Sports.
“Whilst we have been grounded in our expectations for the UK consumer economy, the prolonged weakness of the discretionary goods segment has surprised us,” the veteran retail analyst said.
He pointed to the disparity against other industries such as hospitality, where demand appears slightly stronger.
One example included Fuller’s, which reported like-for-like sales growth of 11% last week, which Black believes is “much more robust than the discretionary retail trade”.
Why the downturn and will it change?
Black believes the slump in demand can be attributed to these reasons:
Pandemic overhang
The Shore Capital analyst argues many “big ticket home item” purchases were brought forward during lockdown, acting as a “hangover on multiple years of future demand”.
In addition, he says the changes to work patterns, especially the move to working from home, dampened consumer spending but could also pave the way for a surge in home item sales.
Cost of living crisis
The steep rises in food and energy costs of the last few years have eaten away at disposable incomes, leading to a shift in lower spending and cheaper alternatives.
Referring to Liz Truss’s disastrous mini-budget, he said consumer confidence collapsed and placed the BoE in a fight against inflation.
Black argued that in 2024, there have been signs of “normalisation as UK energy prices come off their peaks and food disinflation emerges.”
Base rates
“Traditionally, increasing base rates is designed to deter folks from spending
by making the cost of a credit supported sales more expensive whilst incentivising savings,” the Shore Capital vice chairman added.
“The British Monetary Policy Committee, not a group that one senses uses credit to purchase a carpet, will meet on the week commencing 17 June to consider whether or not to change the level of UK base rates.”
Housing market
Black also thinks one reason could be because mortgage approvals and house building have been muted since the pandemic, which was worsened by the rise in interest rates.
However, he noted that Labour plans to try and reform the UK house-building sector, which if the government is true to its word could lead to increased spending for home-related discretionary goods.
Demographic changes
The Shore Capital analyst added that people aged between 18 and 40 are facing increased pressure on their pockets from student loans, high rents and the inability to self-fund a first deposit for a mortgage.
Instead, disposable incomes are going towards expensive leisure experiences such as Taylor Swift concerts or Premier League games, Black added.
Freight challenges
Disruption to the Red Sea hit DFS revenues by as much as £14 million in its last financial year and Black believes other companies are facing higher freight costs too.
“With many higher category consumer goods imported into the UK, ongoing elevated freight costs can be expected to either feed through into higher prices through cost recovery,” he said.
Longer replacement cycle
Another driving force could be that people are keeping goods for longer, aware of the importance of sustainability as society eases away from a “throw-away” culture.
Combined with the issues above, Black believes this is influencing consumers to consider hold onto products for even longer.
So, will spending recover?
Black concluded: “It is going to take some time for the legacy of the pandemic, that is brought-forward sales, working practices and some of the demographic features of the UK consumer economy to play out.
“So, whilst behind our core expectations from the start of 2024, we remain cautiously optimistic for the demand profiles of discretionary consumer goods players in the UK.”