Does the year of the savvy shopper mean the era of the soaring budget companies?

Some companies sell ‘em cheap, they could be airlines, or clothes stores, or supermarkets. Is this their time?

Article updated: 8 March 2018 10:00am Author: Michael Baxter

The economic backdrop

Real wages are stuck - last year, Paul Johnson of the Institute of Fiscal Studies warned that the UK was in danger of losing out on two decades of earnings growth, something he called astonishing.

Well, there are hints that later this year things may flip. Inflation is expected to fall, evidence from surveys suggest wages will rise at a faster pace, so maybe real wage growth will go positive later this year, although I suspect it will be a close call.

The savvy shopper and financial reality

In the meantime, households are feeling the pinch.

As Lloyds Bank found, with its latest spending power report, 54 per cent of people have altered their purchasing routines and 60 per cent have also changed their eating or going out habits this year. As a result, says Lloyds, the average consumer is now spending around £21 a week less. The Lloyds report described 2018 as being on course for being “the year of the savvy spenders.”

Meanwhile, the latest Retail Sales Monitor from the British Retail Consortium (BRC) and KPMG found that in the three months to February, in-store sales of non-food items fell by 3.3 per cent, on a like-for-like basis, while like-for-like food sales rose 2.8 per cent.

Helen Dickinson, chief executive of the BRC, said: “There’s little sign that consumer confidence, rather than financial reality, has much to do with the current weakness in spending. Furniture, often considered the bellwether of consumer confidence, actually saw sales improve in February as shoppers took advantage of credit facilities offered by retailers. The fact is that consumers want to spend, they just don’t have the resources to do so.”

Companies

So, what does this mean? Are shoppers set to go out seeking bargains?

From one point of view, you could say this will be good for the budget players.

And who better to start with than Ryanair and it’s boss, the nice Mr O’Leary. So nice is the boss that he has decided to take time out from being all soft and cuddly with customers, in order to buy back 750 million euros of shares - all because of the kindness of his heart. Kindness pays, it seems, net profits rose 12 per cent in the company’s latest quarter. What with threats by pilots to strike an’ all, the markets were surprised by the strength of the results.

For Ryanair, along with all airlines, a big challenge relates to a shortage of pilots - all of a sudden, Mr O’Leary is allowing unions within the airline and paying pilots more money.

The battle is now commencing. Can the airline keep its costs down? At the moment its operating expenses to revenue are the lowest of the main European airlines. But to keep costs down, the company recently said: “In certain jurisdictions, unions representing competitor airlines will wish to test our commitment to our low cost, high pay/high productivity model to disrupt our operations. We are fully prepared to face down any such disruption if it means defending our cost base or our high productivity model.”

Yet many analysts fear that the pressure of rehiring and keeping pilots will force costs up.

Interesting though all this is, I am not so sure falling real wages are leading to greater sales at Ryanair, passengers always want the cheapest deal, regardless of their financial reality.

What about retail?

Poundland has been busy, increasing the number of its Pep&Co stores - but then this retailer is owned by the international retail conglomerate Steinhoff International, which itself has been hit by an accounting scandal, there are bigger things at play than the habits of UK shoppers for this company’s share price.

Maybe, savvy investors looking to cash in on savvy shoppers should look at Primark, owned by Associated British Foods, with shares up by more than a half over the last five years, but flat over the last 12 months.

Or there is the supermarkets are they close to rustling up a response to the likes of Aldi and Lidl?

For my money, it’s the online players that are more interesting, the likes of ASOS, Boohoo and a certain company named after a rather big river in South America - either that or it is named after a race of warrior women from Greek mythology. I think that many of the savviest shoppers will take a trip down the Amazon website.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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