In newspaper-land, there is always another Bitter Blow for Cash-Strapped Families. The latest is the spectre of rising food prices. Undoubtedly bad for UK consumers, but investors in supermarkets rather like the idea – the sector outpaced the market by about 3 per cent this week. That seems counter-intuitive since – all other things being equal – even passing on higher prices fully to customers should leave profits broadly unchanged.
But supermarkets are obsessed with sales growth and passing on rising prices keeps the top-line looking healthy. Take last year: volumes were probably close to flat, but thanks to inflation (caused by the weak pound) supermarkets such as Wm Morrison and J Sainsbury reported annual like-for-like sales growth of about 5 per cent. The higher prices create momentum that helps profits, too, as operators become less aggressive about discounting because they are less worried about pulling in revenues. European and US supermarkets, in contrast, faced food price deflation last year and wound up in damaging price wars.
The sweet spot, supermarkets reckon, is when food price inflation runs at roughly double that of cost inflation (wages and so on, currently about 2 to 3 per cent). Above that and trading down by cash-strapped consumers again becomes a problem. Were the recent surge in the price of wheat and barley to presage a sustained bout of much-higher inflation, supermarkets would be forced to absorb some of the inflation at the expense of margins.
Still, with much of the world concerned about the economic stagnation wrought by falling consumer prices, there are worse problems to have. Hedging by consumer goods companies also helps to cushion temporary swings in food. Headlines notwithstanding, there is no need for supermarket investors – or consumers – to panic.
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