DC Discusses: Resilient UK consumer sector boosted by improving economic data and strong Christmas spending

Economic resilience amid challenges

Despite facing numerous challenges such as rising interest rates and the cost-of-living crisis, the consumer sector has shown remarkable resilience[i]. The Winter 2023 Consumer Snapshot highlighted a mixed sentiment among UK consumers before Christmas, with varying degrees of confidence across different demographics[ii]. Interestingly, Christmas spending data[iii] and subsequent trading updates[iv] have painted a more robust picture, indicating a possible stabilizing economic environment as we move further into 2024.

Increasing optimism in the Consumer sector

While the economic data has become more positive[v] this year so far, with potentially stronger household finances, stabilized interest rates[vi], and receding inflation[vii], in our view, consumers remain cautiously optimistic. There's a noticeable divide in sentiment, with older and wealthier individuals feeling more positive about the economic landscape. However, a significant portion of consumers still perceive the economy as having worsened, partly due to rising geopolitical tensions and recent news flow regarding a UK recession[viii].

Shifting consumer preferences and key consumer concerns

We believe a shift of consumer preferences is underway, including an increased interest in sustainability among younger consumers and a preference for smaller, more ethical brands over larger, well-known businesses, particularly among the younger demographic. Several key consumer concerns and priorities impacting the sector, include, in our view:

Utility bills and energy market: Despite a softening energy market, utility bills continue to worry consumers, with an increased focus on this issue since November 2023
International political instability: Concerns over geopolitical uncertainty have significantly risen, reflecting heightened consumer anxiety about global issues
Job security and climate change: Job security remains a minor concern, while climate change emerges as a critical issue, especially among younger consumers
Economic outlook: Women and younger demographics generally exhibit more pessimism regarding the economic outlook and believe the economy has worsened, compared to men and older demographics
Disposable income and sustainability: There's an expectation among certain demographics for increased disposable income, alongside a growing emphasis on the environmental and sustainability credentials of products

Consumer sector M&A outlook

As we move past some of the economic challenges that heightened Consumer sector uncertainty last year, signs of optimism amongst consumers are emerging. Combined with an estimated $2.59 trillion of global private equity dry powder ready to be deployed[ix], we are optimistic that there will be an increase in M&A activity in the sector for the remainder of 2024.

We are starting to see the onset of more auction processes for strong, high growth businesses that have traded well over the last few years, slowly replacing the sector default of ‘non process processes’. Financing is more available as the market has become accustomed with the new normal as to interest rates and leverage multiples. Ultimately, time is a great catalyst. We believe that fund and debt maturities, combined with LP pressure to recycle capital, will continue to drive activity in the sector. We believe asset backed and resilient growth operators will be first in line to trade in 2024 with a wider transaction recovery for H1 2024 and into 2025.

To discuss the themes and trends explored in this article in more detail, or for more information on the Consumer sector, please contact our Consumer, Leisure & Retail team.

This article has been prepared solely for information purposes and is not intended to function as a “research report.” In particular, this means that it is not intended, nor does it contain sufficient information, to make a recommendation as to the advisability of investment in, or the value of, any security.

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DC Discusses: Resilient UK Consumer sector boosted by improving economic data and strong Christmas spending

Economic resilience amid challenges

Increasing optimism in the Consumer sector

Shifting consumer preferences and key consumer concerns

Consumer sector M&A outlook

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