Savvy shoppers driving retail spend before inflation kicks in

John Mulheron of financial consultancy CMF Capital shares his views on this year’s retail trends

This week, the retail industry was the latest sector to publish economic data that confounded researchers and pessimistic ‘think tanks’ alike. Along with pollsters, who’ve had a rotten time the last few months, it’s time for some to consider a change of career.
More confusing about October’s 7.4% annual rise in consumer high street spending, the strongest since in 2002, wasn’t that UK shoppers are turning to retail therapy in times of political and economic uncertainty, but it was largely attributed to the weather being colder. A quick check of the Met Office, found this to be – err, rubbish.
Last month was, on average 0.3c higher than any October between 1981 – 2010. Comments like ‘notably mild’ ‘drier than usual’ we’re noted by our weathermen. Villagers in Dyfed (Wales, in case you hadn’t guessed) were sent scrambling for the Factor 12 and jugs of Pimms when the mercury hit 22c three weeks ago.
The other explanation was Halloween. But again, there’s something fishy that pumpkins and sparklers have underpinned our spending bonanza.

John Mulheron of independent corporate financial consultancy CMF Capital said: “My theory, is that shoppers are a pretty savvy bunch. And, at the risk of being sexist, I’m talking generally about women. Men are ‘hunter gatherer shoppers’. We need a shirt or pair of jeans, we know the brands we like, that fit us well and sit within our price range. Our mission is to then visit that shop, engage in as little conversation as possible with any staff, buy what we need and escape relatively unscathed.

“Women on the other hand are a completely different species. They will browse the high street with a handful of purchases locked in their minds, circling shops, analysing prices, sniffing out potential sale opportunities, then dashing into a Costa to see if its cheaper online.

“Yes, online shopping continues to grow, but 88% of all purchases are still made in a physical store. What is interesting, is how online breaks down. Over 50% is spent with retailers who don’t have a high-street presence – think Asos and Amazon. Staples, this week announced it was pulling the plug on its retail spaces, a sensible move as I’d guess most of us don’t see the need in browsing the ‘envelope aisle.’” 

So why are the tills ringing? Perhaps, the reason is both due to mortgage rates being at rock-bottom for the past few years, credit is cheap and we’ve learnt to balance the books, live more within our means and shop smarter? Or, there’s a ‘to hell with it’ attitude, stuff Brexit and Trump, let’s go shopping to lift our moods, plus the savvy shopper is being told that very soon inflation will bite and they’re spending now.

Mulheron added: “What I also buy into, is that the UK’s retail boom has received a boost from tourists taking advantage of the cheap pound. The New York Times called London the ‘bargain basement for luxury’ and the posh arcades around Bond Street and Knightsbridge have been rubbing their hands as Chinese, Russian, Middle Eastern and US well-healed shoppers snap up vastly overpriced designer goods. A Louis Vuitton handbag will set you back £640 as opposed to 780 Euro’s in Paris. I’ll take three please.” 

This retail bonanza is also taking place before the real ‘sales season’ kicks off. Thanks to our friends over the pond, next week will see Black Friday and Cyber Monday take effect. These cut priced ‘days’ are effectively stretching into a couple of weeks as retailers fall on their collective swords to kick start our annual Christmas shopping binge.

Within all this, the elephant still in the room is inflation. It’s only up 0.9% on the year so far, but if experts are to be believed, 2017 is going to see that change. Commodities and raw materials will become more expensive, but in our view the outcome will depend on the retailer and three ways in which they’re able to deal with things.

These factors include their supplier relationships, cost control and finding efficiencies, and lastly how much ‘give’ are in their margins. Retailers are being hit with a rise in the living wage and tough rents which are creating a double whammy.

Unilever came more unstuck over Marmitegate when they tried to slap 10% on a jar of yeast. Apple, Typhoo, Walkers (aka Pepsico) and even the humble Birds Eye fish finger have all warned prices will have to rise. But, are these inflationary rises justified? I don’t believe so.

To produce a fish finger, the ingredients equates to 37%, packaging is 11%, transportation 10%, with marketing costs and finally Captain Birds Eye’s margin at 42%. Therefore, the true price rise should only be around 3-4%.

Clothing brands will probably be next to cite the rise in cotton prices as a reason to inflate prices. But, how can then when a pair of jeans cost around £3.40 in raw materials to produce by a child in Bangladesh? For a pair of $160 Nike trainers the ‘landed’ cost is around $25. Perhaps it’s time they reigned in spending millions on Kanye West and Lebron James. To include marketing costs into the inflationary mix is beyond crafty, seeing as media space – billboards, TV, print – is all bought through local agencies. If anything, multinationals will be saving money using their dollars or Euro’s to buy more inventory.

Mulheron said: “In the long term, a low pound may see the likes of Birds Eye return to Hull, but in the short term the real reason why retail spend is up, is because savvy shoppers are getting in quick before greedy retailers start hiking. It’s time for another demonstration!” 

Sponsored by