Shoppers vs. Inflation Monster
Inflation is rising. Retail Armageddon is coming.
Well, maybe not.
The 12 percent trade-weighted slump in sterling since Britain's vote to leave the European Union has forced up the cost of imported goods, from ham to handbags. But with companies and shoppers taking action to avoid paying higher prices, the impact might not be quite as bad as initially feared. That could support consumer spending and preserve margins.
Most British retailers hedged their exposure to the dollar -- the currency they pay for goods produced in China and South Asia. These contracts will largely expire in the coming months, so a pinch is looming.
But the global slump in clothing demand that's been hurting fashion retailers in Europe and the U.S. means some suppliers are feeling the pain too.
Factories churning out the hottest trends -- such as hand embellishment -- or premium garments, are still in high demand. But for standard, mass-market goods there's plenty of capacity, and that means more wiggle room in negotiations.
Some retailers have been pleasantly surprised by the deals they have been able to strike with factories hungry for orders. The sterling slump has been so severe that canny negotiations can't whittle away all of the foreign exchange driven inflation. But it can help limit it. That's particularly handy for those who focus on charging low prices, such as Associated British Foods Plc's Primark and those with skinny margins, such as Debenhams Plc.
Next Plc has said it expects to pass on no more than 5 percent of price increases to consumers. For the mass clothing market, that seems the right ballpark. It won't always be clear to consumers where prices have gone up -- thanks to changing fashions, there are few directly comparable garments. Where it is, they'll likely rein in spending, but perhaps by not as much as feared.
The weak pound will also increase food prices. Tesco Plc and Unilever NV have already had a very public spat over the price of Marmite. The Anglo-Dutch food giant warned last week that British shoppers would have to get used to higher prices.
And that's exactly what's happening.
When food cost spiked in 2011, shoppers dug deep to quell the impact. They changed their behaviors. For example, friends clubbed together to buy extra large packs of toilet rolls or mince meat and then split them to get a cheaper price per item. They switched from Heinz baked beans into Tesco own-label. But most significant of all, shoppers bought less from the likes of Tesco and J Sainsbury Plc, and more at the no-frills supermarkets Aldi and Lidl.
While more spending power and a vicious supermarket price war have prompted some shoppers to spend more freely, many consumers haven't completely unlearned the habits of the downturn. And if food prices tick up, they can simply switch back to their more thrifty ways. What's more, while Aldi and Lidl U.K.'s same store sales might be slowing, they are still opening stores apace, exposing more Britons to their cut-price fare.
That won't alter the inflation figure that appears in official statistics, but it could limit the squeeze on consumers from rising food prices. The Bank of England's views on spending will be worth watching when officials publish new forecasts on Thursday.
And canny consumer behavior means supermarkets won’t benefit as much from inflation. Falling food prices mean the grocers have to sell more loaves of bread or packs of potatoes to achieve the same value of sales. A little inflation can help ease this pressure. But if consumers choose to manage their own inflation, that headache won't be alleviated quite so quickly.
Of course the wild card in all this is how much retailers are willing -- and able -- to pass on to shoppers.
Aside from a brief spell six years ago when the cost of cotton spiraled, Brits have largely enjoyed more than a decade of clothing deflation. The supermarket price war means they have got used to falling food costs, too. With employment holding up and wages rising, many shoppers can afford to pay more. But, having been used to low prices for so long, they may not want to.
To contact the author of this story:
Andrea Felsted in London at firstname.lastname@example.org
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Jennifer Ryan at email@example.com