Consumer-facing companies are facing the dual challenge of reduced consumer spending as well as increased competition, according to State Street Global Advisors.
The latest Australian equities commentary from State Street Global Advisors has warned that a range of factors resulting in lower consumer spend will be felt by the consumer-facing sector.
Consumers are struggling with mounting financial pressure due to consumer price inflation, a slowdown in wages growth, rising household debt and growing costs of living.
Speaking to InvestorDaily, commentary co-author and State Street Asia Pacific head of active quantitative equities Toby Warburton said that the income squeeze felt by consumers would impact elements of the consumer discretionary sector.
“Traditionally, as consumers feel uncertain in terms of the economic outlook or, as now, face increasing costs and stagnant incomes, they attempt to cut back on more discretionary spending,” Mr Warburton said.
“The sector, though, is broad, with retail, gaming, media companies for example being affected to different degrees.”
Impacted later down the chain are consumer staples stocks, such as groceries or utilities , he said.
On top of this income squeeze, new and disruptive entrants in the market offering cheaper options to consumers are also affecting the consumer sector across both discretionary and staples stocks.
“The bigger challenge is typified by what we’ve seen with the low-cost entrants to the supermarket sector over the past few years,” Mr Warburton said.
“Their business model has not been centred around customer choice or service per se, but around scale, sourcing and distribution efficiencies. These efficiencies get passed on to the consumer by means of lower prices.
“For an income-constrained consumer, that proposition becomes increasingly attractive.”
For consumer-facing companies to succeed, they will need to have “unique competitive advantages” or evolve and adapt to “flourish in the face of competition”.
Although this will benefit consumers in the long-term by way of lower prices, both discretionary and retail sectors in Australia have experienced “weak returns and increased volatility”.
But, Mr Warburton added, “what we’ve found interesting from an investment perspective is that with the negative sentiment towards these sectors as a whole we can find great opportunities”.