Personal Investing
Jonathan Wright, Fidelity Personal Investing 10 May 2017 02:26pm

The battle for the squeezed middle

SPONSORED FEATURE: Recently we’ve seen a contrasting set of results from retailers, especially those aimed at the "squeezed middle" - those with low to middle incomes which have not been rising as fast as their expenses, or not at all

Caption: Companies must constantly adapt to changing consumer habits.

Yesterday the clothing chain Next announced an 8.1% decline in full-price store sales and told investors not to expect profits to come close to last year’s already weakened result.

In its trading statement the retailer blamed the challenging UK consumer environment for the negative performance, particularly in the clothing and homeware markets where rising inflation is eroding any real wage growth and leaving shoppers squeezed.

Facing steep competition from online retailers such as ASOS and rising import costs thanks to a weaker pound, the retailer warned the outlook “remains challenging”.

This is a message shareholders are familiar with as in the past its Chief Executive Lord Wolfson has likened trading conditions to “walking up the down escalator”. For Next it seems like the escalator shows no signs of changing direction.

In contrast, Wm Morrison announced that sales in its supermarkets rose 3% in the first quarter of this year, beating market expectations and offering further evidence that its turnaround strategy is gathering momentum.

David Potts, the Tesco executive hired in 2015 to revive the supermarket chain, credited the growth improvements to own-brand products, a new stock management system and shorter checkout queues. The introduction of the "Best" premium own-brand range and more healthy options have also pulled in more affluent shoppers, without alienating the traditional cost-sensitive customer base.

Attracting those shoppers willing to pay a little more for better quality is a sensible move for Morrisons as inflation starts to force retailers to raise their prices.

It’s no surprise then to see the launch of a radical new advertising campaign this week from Marks & Spencer aimed at those looking for quality. With a new "Spend it well" tagline being used for the first time across both its food and clothing divisions, M&S are firmly setting their sights on more premium-orientated customers.

M&S’ executive director of customer marketing, Patrick Bousquet-Chavanne, describes the trendy new advertising approach as a way of “empowering our customers to say no to the ordinary, so they can say yes to the best”.

M&S has successfully demonstrated this in its highly-regarded food division, aimed at the high end shopper. It has also broadened the food market by offering premium, fresh food at garage forecourts with the Simply Food stores, but is still struggling to get it right with clothing.

So what is all this telling us? Firstly inflation is creeping up again and it’s easier for retailers to disguise price rises in the premium end of their product ranges.

Also, it tells us that consumer behaviour is constantly changing and, in a service-led economy like the UK’s, it’s important to keep up with the trends. The UK consumer is still buying the essentials but spending less on clothes and more on experiences and leisure.

It’s interesting then to hear that JAB the German investment firm is planning to put up for sale its 70% stake in the high end shoemaker Jimmy Choo as it focuses on its food and beverage related businesses. It already owns Nespresso competitor Keurig Green Mountain and doughnut retailer Krispy Kreme and is considering selling its holding in Swiss shoemaker Bally in an attempt to challenge Nestlé as the dominant provider of coffee worldwide.

Take a look at the history of any high street around the country and they’ll share a similar story of changing consumer habits. From the advent of supermarkets and out of town shopping malls to more subtle changes like banks becoming restaurants, and pubs becoming Tesco Expresses or drive-in McDonalds, town centres are adapting to our needs and profits can be made from these shifting patterns.

As disposable incomes are further squeezed by rising prices and stagnant wages, companies will battle over their share of our hard-earned spare cash. Canny businesses will find new ways for us to connect and share experiences with each other, while still spending our money.

Just as the consumer is evolving so also is the worker. My prediction for another change we will see on the high street will be the rise of co-working, shared office spaces where freelancers choose to work together with like-minded individuals rather than on their own at home.

These won’t be faceless office spaces but intimate, well designed places geared to create networking and collaborative opportunities, possibly around complementary occupations. In the next episode of MoneyTalk we visit one such place and look at the challenges this new way of working creates for the self-employed. Look out for it later this month.

Often it is small and medium size companies that are ambitious and nimble enough to experiment in new and evolving areas. The Franklin UK Smaller Companies Fund looks for such companies and has a holding in Clipper Logistics, a distribution company that services large retailers like John Lewis and ASOS to manage their returns, as 30% of clothes bought online are returned.

Further up the scale the Threadneedle UK Mid 250 Fund looks at ‘mid-cap’ stocks just outside the FTSE 100 on the cusp of being large. One of their holdings is Just Eat plc the online food order and delivery service which acts as a one-stop intermediary between independent take-away food outlets and customers. Both funds are on our Select 50.

The consumer is constantly evolving and looking for new ways to spend their limited money in their limited free time. Forward thinking retailers must continue to anticipate their next move. The UK economy depends on it.

Jonathan Wright

Jonathan Wright

Jonathan graduated from Coventry University with a degree in business administration. He joined Fidelity in 1997 and has worked in a number of different operations and marketing roles in the UK and India. He is currently a senior production manager for the Markets and Insights team in Fidelity’s Personal Investing Channel.

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