Value sector facing a shake-out

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So the UK is again in recession. GDP figures last month confirmed fears of a double dip and prompted speculation over the impact on consumer confidence.

Retailers could have responded by saying ‘tell us something we didn’t know’. Since the credit crunch hit, consumers have never really come out of recession, or at least recessionary behaviour. They have been hit by falling disposable income and are on the front line of cutbacks. Many have reacted pragmatically, buying fewer items or trading down.

So in the sense that consumers are already behaving this way, the latest news won’t change matters much. Things are not about to get a lot better certainly, but equally, they’re not about to get a lot worse. We are bumping along the bottom with economic headwinds and tailwinds largely cancelling each other out.

Deloitte’s latest Consumer Tracker showed sentiment across a range of measurements is improving slightly. 18% of consumers feel pessimistic about job security, while 22% are downbeat about their personal debt levels, but this compares with 24% and 25% respectively three months ago. The indicator with most negativity is disposable income – over half feel pessimistic about the prospect of having more money in their pocket in the next three months.

What does this mean for retailers? Interestingly, the biggest impact could be at the value end. In recent years, the sector grew rapidly as consumers turned to cheaper products. It is a model built on volumes but two factors are challenging future growth. First, broadly speaking, those consumers prepared to trade down have now largely done so.

Our tracker showed that of those consumers spending less in the past quarter, only 27% did so through buying cheaper products, compared with 32% in the previous quarter and 40% three months prior to that. I don’t expect a further sweeping migration of consumers from the mid-market. Future growth will need to be taken from other value players, rather than through the rewards of an expanding market.

Second, the markets from which value players import most of their goods are growing quicker than the UK. Inflation is being imported, making it harder for these retailers to keep prices as low as their customers have come to expect.

Of course, this is an issue facing the sector as a whole but when a model is built on volume purchases, there is a significant effect when consumers buy fewer items. We are already seeing the impact of these trends, with the first signs of distress among some of the value chains. This will continue. The value sector has been an extraordinary success story in recent years but it faces tougher tests ahead.

For many, with volume throughput in decline, their low price points often don’t deliver the revenue the business requires. Increasing prices is fine if everyone does it in tandem, but the stronger players are better able to deal with lower volumes, and the prospect of becoming less competitive versus rivals leaves many caught between a rock and a hard place.

Meanwhile, middle-market players have become more price competitive to defend their market share. A shake-out is inevitable.