A little bit of UK consumer economics

A little bit of UK consumer economics: Politicians and central bankers are scared stiff of deflation, with Japan being seen as the modern example of the resultant economic porridge. So with deflation in our supermarkets and energy costs coming down, the overall inflation rate is set to stay well below the MPC’s 2% central target. Indeed Mark Carney may be sending regular postcards this year to George Osborne explaining sub 1% inflation rates. So the prospect of UK interest rate rises seems to be being pushed away again, which will suit the government just fine in the run up to May’s election.

In rough and ready terms the average UK household disposable income is £150-£160 per week. Mike Coupe at Sainsbury, this week quantified the benefit of recent fuel and food price drops at £10 per week per household. This is a c6.5% increase at a time when wage rates are just beginning to pick up. So the good news is that consumers have more money to spend (not all of it will go to savings and debt reduction). The bad news for consumer companies is that their customers have better price information than at any time in history. Yes, “Black Friday” was a success in terms of publicity and sales but probably only brought forward future sales and completed them at miserable margins. We are all used now to checking “brick” prices against “click” prices before we purchase and the seller is on the back foot.

So the successful consumer companies have to offer something in particular. It may be ambience, service and choice (John Lewis) or convenience and price (Lidl or Aldi). None of these are UK quoted companies though. In the quoted space, Next has been a good operator at combining on-line, store appeal and price (as the share price shows), whilst M&S shows what happens when a dull clothes offering meets bland stores. When you look for stocks exposed to the slightly flusher UK consumer and not competing purely on price, the pubs and restaurants leap out. In general people like going out and there is plenty to choose from, with some companies such as Greene King offering something at almost all price points. Others such as Marston’s, Mitchell & Butler and JD Wetherspoon also fit the bill. As a broad suggestion it is this ‘eating out with a drink’ consumer theme which investors should look at, with many of the sector’s shares not looking that expensive. (Neil Cumming^, 9^th January 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower