Pepco Says Squeezed Middle Class Is Powering Customer Growth And Margins

What Pepco is seeing on the ground

Europe's middle class is tightening belts, and Pepco is catching the spillover. CEO Stephan Borchert says shoppers are moving to cheaper options amid inflation and uncertainty, which is good for store visits at the low-cost chain. He links the trend to profitability too, noting: "What we see is really a trading down of middle class, which is a driver for our margins, as the group buys a little bit higher-priced product." In his words, "Customers really want to pamper themselves a little bit, to have a little reward in difficult times and, if they are on a budget - they are looking for nice things at a good price." He added, "We do not see a reduction in customer traffic in Europe."

Market and macro backdrop

Across the region, sentiment has cooled as energy prices climb alongside the ongoing US-led conflict in the Middle East. Poland, Pepco's largest market, saw individual consumption grow at its slowest clip in over a year during April to June, and households in the euro area report rising inflation expectations.

Growth, guidance and possible deals

Pepco has leaned on organic expansion and has sold assets that did not fit its assortment. Borchert said he remains at ease with the group's guidance for the financial year that closes Sept. 30. Strong sales momentum extended into the July to September quarter. He is not ruling out acquisitions if the right opportunity appears, pointing to a broader takeover wave: Last week, Puig Brands SA reached an agreement to buy the remaining 50% of Isdin SA it did not already own, and Czech billionaire Daniel Kretinsky's EP Group AS is seeking to acquire France's Fnac Darty. But we of course look around."

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