Budget brands thrive during cost-of-living crisis
One of the interesting trends to come out of the just completed Australian profit season was the ability of budget brands that delivered well to successfully turn profits despite – or perhaps because of – the cost-of-living crisis.
One of the clearest examples was Kmart, which enjoyed a 4.4% increase in sales at a time when many other retailers are really struggling to maintain sales and profits.
The key to its success – which was also the key to achieving respectable overall results for owner Wesfarmers (ASX: WES), was having the right products at the right price points to attract shoppers of all ages.
Most products bear the Anko brand
Around 85% of those products bore Kmart’s Anko brand, which has become very popular for following some of the latest design trends and producing copies similar to popular appliances at very keen prices.
It has done that not just by buying products and sticking its Anko brand on them but by becoming heavily involved in the design and manufacturing of the products to reduce returns.
This has given Kmart great control over the price and the quality of the goods that are on its shelves, meaning it can literally sell massive volumes of popular items at prices that other retailers can’t come close to matching.
Low price and high-quality magnet for shoppers
When you put a large range of such product lines under one roof, it can prove to be a strong magnet to attract shoppers of all ages and direct more of their scarce discretionary spending to your store and away from others.
It will be interesting to see whether the move to put more Anko branded lines into Kmart’s ailing sister chain Target will help to rejuvenate its fortunes as well.
It was a similar situation under very different circumstances over at Qantas, which was battling to recover customers after treating them very harshly over refunds for fares bought before and during the COVID pandemic period.
Jetstar props up Qantas
In the post-lockdown period travel was a very high priority and here it was not the main Qantas brand that prospered but its budget offshoot Jetstar.
Low priced leisure airfares to new routes including Japan and South Korea proved to be very popular and led to Jetstar posting a record year with earnings of $497 million compared to $404 million in the previous year.
That helped to prevent an even bigger earnings slide for the wider Qantas Group (ASX: QAN), which still saw before-tax profits plunge 18.6% from last year’s record number to $2.078 billion in the year to June 2024.
Despite the cost-of-living crunch, bargain conscious flyers were still keen to travel, with Jetstar coping with a 15% rise in people flown to 14.7 million.
That was up 15% on the previous year but it was the international routes that really drove increased profitability for Jetstar.
Offshore routes booming
Jetstar’s overseas routes flew 8.3 million people, up close to 20%, pushing international Jetstar earnings up 65% to $199 million.
The key here was adding capacity to routes by using A321 Neos to service shorter routes, freeing up the higher capacity 787-8 planes to cater for the longer routes.
That capacity increase will continue in the coming year with Jetstar a particular focus of the plans to add 10% capacity overall across Qantas.
Jetstar’s international arm is expected to add about 24% to capacity while its Asian business will be expanded by 53%, which should see Jetstar produce even greater earnings for Qantas in the coming year.
Budget brands do the heavy lifting
What is clear from both of these results is that the budget brands of Anko for Kmart and Jetstar for Qantas were able to drive significant growth because they were ideally suited for the cheap and cheerful atmosphere created by a cost-of-living crunch.
In both cases it wasn’t enough just to be cheap – the products had to measure up well on a value and quality perspective but having done that, they were responsible for driving growth even as their parent brands were put under pressure due to falling discretionary income.