Discount chain B&M has warned its profits could fall as customers struggling with a cost-of-living crisis choose cheaper products.

He highlighted the “uncertain macroeconomic outlook” that could prompt customers to switch to cheaper products, making it difficult to predict the impact of inflation on sales volumes.

UK households are adjusting to inflation hitting a 40-year high as consumer prices rise, particularly on the back of higher energy prices. This left them with less money for discretionary spending and made investors worried about the prospects for retailers.

B&M’s share price fell more than 11% on Tuesday morning, the biggest drop on the FTSE 100 index. The share price fell to its lowest level since June 2020, three months before B&M joined the FTSE 100.

B&M has been one of the winners of Covid in the retail industry by allowing it to remain open during the shutdown.

B&M said Tuesday it expects customers to shift spending away from discretionary, higher-margin products like gardening supplies and Christmas decorations in favor of staples like groceries and toiletries.

Discounters like B&M hope the effect will be mitigated as shoppers look for cheaper options. However, Simon Arora, B&M’s largest shareholder and outgoing CEO, acknowledged the difficulties facing the industry.

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“The retail industry is facing inflationary pressures as our customers deal with a significant increase in the cost of living, which makes it difficult to predict spending patterns in the year ahead,” he said.

“However, we have seen before that customers are increasingly looking for value for money in times like these, and B&M is ideally positioned to meet these needs.”

Arora, who announced his retirement last month, will be replaced as CEO by Alex Russo, a former Asda and Tesco director and owner of B&Q Kingfisher who served as Arora’s chief financial officer. Russo will be offered a salary of £800,000 plus the opportunity to quadruple the rewards.

The company said profit margins will fall 0.7 to 1.3 percentage points but remain structurally higher than they were before the pandemic, with the preferred measure of profitability expected to be between £550 million and £600 million.

That would be down from £619m last year, but up from £342m in the financial year that ended in 2020, before the pandemic hit the UK.