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Bingo for the high street?

After the toughest five years for UK households since the 1950s, signs of improvement have arrived. Rathbone Income Fund equity analyst Keval Thakrar gives the case for British retailers.

By Keval Thakrar 25 September 2024

After years of clutching their wallets tighter than a granny's handbag in a crowded bingo hall, UK consumers can finally breathe a little easier. For the first time in ages, there’s some good news on the financial horizon – and it doesn’t involve discovering a forgotten tenner in last winter's coat. Inflation has gradually cooled and wage growth has outpaced it, so the outlook for the UK consumer has improved markedly. Remember that UK inflation-adjusted income has fallen more over the past five years than any time since the 1950s, according to the Resolution Foundation economic thinktank. 

Food inflation, which soared like a rocket in 2023, has finally begun to descend, thanks to calmer supply chains and cheaper costs in some food categories. On the energy front, the past few years have been a bit of a rollercoaster, with prices bouncing around due to the energy crisis sparked by Russia’s invasion of Ukraine. Despite remaining higher than pre-crisis levels, prices have steadied compared to the peaks of late 2022 and early 2023, bringing a sigh of relief, and a bit more confidence to consumers. And while higher global energy prices have increased the UK household’s price cap by 10%, the new typical household annual bill will still be well below the £2,500 of late 2023.

Headline CPI inflation has cooled significantly and is currently only just above the Bank of England’s (BoE) target of 2%. Meanwhile, annual earnings growth has moderated, coming in at 5.1% (excluding bonuses) for the three months to July. Yet, excluding the pandemic period, that’s still higher than any other time for the past decade. This means wages are continuing to rise in real terms, providing consumers with more spending power.

Even I’ve noticed a change – I'm finally at that point where I don't flinch at the thought of ordering avocado toast and getting that extra latte. I’m feeling like my bank account can handle my "treat yourself" moments a bit more these days! I think this experience is emblematic of a broader trend where people are beginning to feel a bit more financially secure, allowing for a cautious return to discretionary spending.

Lower mortgage payments would further boost households 

The further easing in wage growth will be welcomed by the BoE as a sign that the labour market is continuing to cool, while unemployment remains low. This lends some support to the forecast that the BoE will press ahead with another 25-basis-point interest rate cut in November. As that flows through to lower mortgage payments, it should further boost people’s discretionary spending. 

The benefits of these economic trends have led to upward revisions in UK GDP, with the Q1 growth estimate increasing from 0.6% to 0.7%. That was followed by a 0.6% rise in Q2. PMI business surveys have slowly started to trend higher, signalling sustained economic expansion. Finally, house prices have begun to rebound, which tends to underpin consumer confidence among property-mad Brits. Overall, things are looking up.

Along with the political stability offered by the new Labour government’s hefty majority, this economic brightness has lightened the mood surrounding the UK economy and its markets. Despite this palpable optimism, it’s essential to acknowledge that the UK is still navigating a cost-of-living crisis. Energy bills, while lower than last winter, remain significantly above pre-crisis levels, and food prices, although stabilising, are still high. However, consumer confidence has been steadily rising and is now at its highest level since the period of lifting lockdowns back in 2021. 

So how are we making the most of a stronger UK consumer?  

We own retail giants Tesco and Sainsbury's, given the market share gains they’ve made in recent times. Competitors Asda and Morrisons are now owned by private equity, which came with the obligatory wave of debt. As borrowing costs rose, this has constrained how much cash they have to invest or discount prices to gain shoppers. There’s also less competition from the discounters, as Aldi and Lidl are preoccupied with their US expansion. Sainsbury’s has the added benefit of owning Argos, which should benefit from renewed spending on discretionary goods.  

We also like discount retailer, B&M European Value Retail. Even as consumers feel more confident, they remain cost-conscious, and B&M’s value proposition resonates. The company’s focus on affordable home goods, toys, and seasonal items makes it a go-to destination for budget-conscious shoppers looking to stretch their pounds further. As more consumers start to spend on home improvements and lifestyle products, B&M’s broad range should attract increased footfall.

Meanwhile, Dunelm, which specialises in home furnishings, is likely to see a resurgence in sales as consumers resume spending on their living spaces, particularly as lending rates fall. With many people still working from home, there’s an ongoing interest in making living spaces more comfortable and aesthetically pleasing. Dunelm’s affordable yet stylish product lines make it an attractive option for people looking to refresh their homes without breaking the bank. The business has successfully increased its share of the UK homewares market and is strategically growing its furniture offering. Lower mortgage rates and a rebound in home sales should further serve as a tailwind for Dunelm. 

Of course, if the UK economic uplift sputters out, taking retail sales with it, these retailers could take a knock from worried or disappointed investors. The path of UK interest rates will be a big part of continuing to alleviate the strain on British households.

So, after years of holding on to their cash like a granny with her bingo winnings, people are finally loosening their grip. With inflation taking a breather and wages rising in real terms, there’s a renewed sense of financial stability. As spending on both essentials and little luxuries picks up, we think the UK consumer is slowly but surely making a comeback – just in time to call "bingo!" on the economic front.

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