Consumers trade down

The trend of consumers trading down is not new, but is becoming increasingly palpable. Over the past few months, analysts’ reports have highlighted this trend.

Consumers are becoming more selective about what they buy and where they shop, shifting towards cheaper, value- for-money alternatives and prioritising essential purchases over discretionary ones.

This is showing up in a growing preference for value-oriented retailers such as MR DIY Group (M) Bhd and Eco-Shop Marketing Bhd.

BIMB Research, which has downgraded its call on the consumer sector to “neutral” from “overweight”, says the sector is entering a margin-driven downcycle despite resilient demand fundamentals, with the focus shifting from growth to cost discipline and pricing power.

Increasing downtrading tendencies, coupled with the absence of festive-driven spending and supply chain disruptions stemming from the Middle East war, are likely to keep discretionary demand under pressure.

Retail trade sales grew 6.6% year-on-year (y-o-y) in June, down from 7.2% in May and 7.5% in March.

Another research house notes that several listed local retailers and consumer-staples companies have flagged cautious consumer sentiment, with households becoming more price-conscious and shifting towards a defensive, needs-based basket – a caution that management teams attribute to geopolitical tensions and the perceived economic fallout.

This is why investors will need to keep a close eye on listed retail companies.

Additionally, there could be greater earnings dispersion within the sector.

While companies exposed to necessities, value-for-money propositions and frequent purchases should remain relatively resilient, businesses dependent on discretionary spending or aggressive pricing could face greater pressure on volumes and margins.

The big question will be whether certain retail stocks will continue to enjoy premium valuations, or whether these will slowly erode as consumers become increasingly price- sensitive.