Discount retailers are likely to bear the brunt of rising inflation and the cost of living crisis, according to Deutsche Bank, which goes against the traditional argument that discounters do better from people 'trading down' during a recession.
The Deutsche analysts argued that “income demographics will be as important as category or channel” going forward, with the cost-of-living crisis disproportionately impacting lower-income households.
As a result, the companies with the highest proportion of sales from lower-income householders will suffer the most.
Specifically, the broker highlights B&M European Value Retail SA (LSE:BME) and Primark, owned by AB Foods (LSE:ABF) as most vulnerable in 2022, while Marks and Spencer Group PLC (LSE:MKS) and ASOS PLC (AIM:ASC) the best-placed.
Deutsche cited home categories as worst placed for inflation, with clothing better situated to deal with the cost-of living crisis.
However, Kingfisher PLC (LSE:KGF) was given a 'buy' recommendation due to its exposure to higher income demographics, as well as ASOS.
B&M is a 'sell', while M&S has been downgraded to 'hold' from 'buy' due to its premium food prices giving scope for people to trade down and its weakness in clothing.
Consumer confidence is “falling rapidly”, the bank's analysts noted, as real wage growth returned to negative territory amid heightened inflation.
Spending is still up and ahead of pandemic levels but is quickly falling, with nearly half of consumers spending 40% of their money on essentials.
Spending on luxuries, going out and takeaway food will see the biggest cutbacks, with clothing the largest in retail, according to the analysts.