Langton Capital – 2016-12-07 – 60 Seconds on Inflation, Margins, and Savvy Customers

Inflationary Pressures and the Spectre of Price Rises

• Inflation is coming in 2017 – but how much will there be, and who is most affected?
• Forecasts can be a fool’s game, but that doesn’t stop us from giving our two cents.
• Evidence suggests the UK consumer credit cycle is relatively mature, with many households extended and increasingly value-focused.
• Meaning input cost inflation (supply prices are c2% up on last year, per Prestige) will be absorbed by the company should it wish to retain its customer base.

Inflation feeding through the system – who blinks first?

• The latest BRC data notes that although ‘November took shop price deflation into its 43rd month’ this is because of ‘retailers’ effectiveness in controlling inflationary pressure.’
• Meanwhile, ‘increasingly value-driven and informed customers mean retailers will have to remain highly competitive.’
• A similar point might be made across the Leisure industry – when it comes to price rises in 2017, most operators will be playing a game of Who Blinks First.

The UK consumer: value-conscious, tech-savvy, disloyal, and indebted?

• We are now seven years into a bull run. Consumers have been spending more and saving less but real wage growth has been slow.
• Exceptionally low interest rates and easy access to cash has spurred higher household borrowing.
• The Bank of England confirms this: households are in ‘the early phase of re-leveraging’ with increasing unsecured credit. Meanwhile credit scoring criteria ‘continued to loosen’ and defaults are increasing.
• All of this paints a picture of overextended household finances, suggesting that operators may have to sacrifice margins for a while yet.