With the biggest strain on consumer spending since 1921, which firms will be hit hardest?
According to a report released on Monday by economics consultancy the Centre for Economics and Business Research (CEBR), UK disposable incomes are under the greatest pressure for 90 years.
The big squeeze
The CEBR warns that 2010/11 will see the biggest fall in real household disposable incomes since 1921. The forecaster predicts that 'real' (after-inflation) household disposable income will fall 2% in 2011, on top of a 0.8% fall in 2010.
This is based on the CEBR's estimates for inflation of 3.9% in 2011, which would be the highest increase in the cost of living since 1992. At 1.9%, earnings growth will be much weaker, thanks to unemployment remaining high.
The last time we Brits saw our disposable incomes squeezed nearly so hard was in 1976/77, when real incomes fell 2.7% over two years.
Indeed, this latest fall will be even greater than the infamous squeeze seen in the Great Depression of the Thirties. However, the CEBR has excluded the drops in income caused by World War II (1939-45) and the General Strike of 1926.
A 'perfect storm' hits the high street
Thus, the CEBR estimates that UK households will have £27.3 billion less spending power in 2011 than in 2009 -- a decrease of £910 per dwelling.
Thanks to this spending squeeze, together with the government's austerity programme for public spending, the CEBR has reduced its forecast for UK gross domestic product (GDP) growth. At 1%, it is well below the 1.7% rise predicted by the independent Office for Budget Responsibility (OBR) in last month's Budget.
Going 'ex-growth'
With consumer spending set to shrink by 0.8% in 2011 (and remain weak for a further two years), many businesses will be hit hard when the 'growth punchbowl' goes away.
We've already seen evidence of this happening, of course. Many retailers have warned on profits in recent weeks and the British Retail Consortium said March retail sales saw the biggest monthly fall since it started collecting data in the mid 1990s.
With such a large sum being removed from wallets and purses, my view is that consumers will focus on must-have purchases, rather than nice-to-have treats. In other words, spending on big-ticket items and top-end or impulse purchases is likely to be under most pressure.
Hence, the biggest losers are likely to be those companies who operate on low margins and have grown accustomed to their revenues and profits being boosted by rising consumer spending.
Any search for such 'at risk' companies should certainly include filters for falling sales, weakening cash flow, reduced margins, and high levels of debt and operational gearing. Firms in such poor shape are least likely to get through the next 24 months unscathed.
Who will be hit hardest?
Given that discretionary spending will be hit hard, I reckon that companies providing treats, luxuries and indulgences will suffer most. By this, I don't mean chocolates and the odd trip to the cinema, so Thorntons (LSE: THT) and Cineworld (LSE: CINE) should fare reasonably well.
However, I think that highly indebted nightclub operator Luminar (LSE: LMR) will continue to struggle, thanks to lower consumer spending and rising unemployment among young clubbers. Likewise, highly geared pub groups such as Punch Taverns (LSE: PUB) could see cash-flow dive as punters stay away.
I suspect that things could get difficult on dealer forecourts, too. On an annual basis, new-car sales fell 8% last month, largely because of the scrapping of the £2,000 scrappage incentive in March 2010. Hence, car dealers could wobble, hitting the shares of such firms as Pendragon (LSE: PDG), Lookers (LSE: LOOK) and Vertu Motors (LSE: VTU).
Things could turn nastier on the high street, too. If consumers do start to defer or abandon home improvements, then sales could slide further at the likes of Carpetright (LSE: CPR), Homebase owner Home Retail Group (LSE: HOME), B&Q owner Kingfisher (LSE: KGF) and floor-coverings firm Topps Tiles (LSE: TPT).
Also, consumers aren't going to be jetting off on holidays and short breaks if they're worried about hanging onto their jobs and paying basic bills. Hence, sales could slip for travel firms and airlines, hitting shares in cruise operator Carnival (LSE: CCL), International Consolidated Airlines Group (LSE: IAG) (formerly BA and Iberia), and tour operator TUI Travel (LSE: TUI).
On the flipside
In my view, companies dealing with high-net-worth individuals -- for instance, luxury-goods manufacturers and high-end car dealers -- will largely avoid the worst effects of this sustained squeeze.
After all, when your wealth is measured in seven, eight or more figures, losing thousands here and there isn't going to curb your desires. This should be of comfort to the likes of Burberry (LSE: BRBY) and France's LVMH, whose sales in emerging markets are storming ahead.
Similarly, commodity producers (those producing oil, metals, cotton, energy and other essential supplies) should do well as prices of these products surge. So, look to oil supermajors such as BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) and global mega-miners to do well during this squeeze.
Likewise, defensive industries -- such as pharmaceuticals, utilities, and the very biggest retailers such as Tesco (LSE: TSCO) -- could be set for another day in the sun. One test of the resilience of these companies should be their bumper dividends, such as these Billion-Pound Dividend Payers.
Also, the CEBR reckons that the sector with the strongest growth is likely to be business spending on IT, which could boost the likes of FTSE 100 software firm Autonomy (LSE: AU).
What about banks?
Finally, the Office for Budget Responsibility reckons that consumers will attempt to offset reduced incomes with rising levels of indebtedness. In other words, some Brits will attempt to borrow their way out of the squeeze. In all probability, this is likely to have a negative impact on Britain's banks, as bad debts continue to mount up.
As ever, watch this space for the latest corporate news...
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