Amidst big upheaval Lewis and Potts impress the City...

With the shock of Brexit and the election of Donald Trump, 2016 was for many a year to forget but for two of the UK’s biggest food retailers it was a cause for celebration.

Despite persistent deflation, ongoing price wars and Marmitegate, the turnaround plans of Messrs Lewis and Potts at Tesco and Morrisons picked up considerable speed. The pair feature strongly in the top risers of The Grocer’s company and sector performance tracker - adding £5bn and £2bn to their respective market values. However, Sainsbury’s (and privately owned Asda) continued to struggle, despite momentum slowing at Aldi and Lidl.

“A year ago, the food retail sector seemed beset by structural problems, with the discounters running riot, but 2016 has actually turned out to be a pretty good year for the sector on the stock market,” says retail analyst Nick Bubb.

Tesco revealed the first quarterly rise in sales in three years in April and CEO Dave Lewis declared the supermarket officially “out of crisis” at the half-year results in October as like-for-like sales grew for a third consecutive quarter.

Morrisons started 2016 as it meant to go on, with like-for-like sales turning positive in January for the first time since 2011 and four straight quarters of growth recorded by the year-end. An eyecatching supply agreement with Amazon in March, the renegotiation of the Ocado contract in the summer and the launch of a store pick service on Amazon Prime in November added to the excitement of value investors about the Morrisons investment case, according to Bernstein analysts Bruno Monteyne and Tom Wharram.

Sainsbury’s was the noticeable laggard of the listed grocers as the share price (down 4.7% to 249.3p) was held back by uncertainty over the wisdom of the Argos acquisition - and declining profits revealed in November didn’t help either.

Monteyne and Wharram add: “Fears of a Brexit-driven recession combined with FX-related price rises now impact Sainsbury’s more [than rivals] due to its higher non-food exposure through Argos.” However, as the Bernstein analysts highlight, Sainsbury’s stock was buoyant in 2015 compared with a 22% slump at Tesco and a 20% fall for Morrisons, which saw it exit the FTSE 100.

Supermarket meat suppliers Hilton Food Group and Cranswick also made hay in 2016, up 17% and 22% respectively with significant growth in volumes.

Profits at Tesco red meat packer Hilton soared on the back of the supermarket’s recovery and the success of the own-label Farms brands range, while Cranswick invested heavily in its facilities and further bolt-on acquisitions.

Premier Foods’ long-awaited recovery in sales growth contributed to an 18% jump in shares to 46.8p. Jefferies analyst Martin Deboo says it was a “rollercoaster” year for investors, with the stock hitting 57p at the height of the rebuffed takeover pursuit by McCormick and an Indian summer seeing customers avoid its gravy, stocks and sauces well into the autumn. Deboo adds that the fortunes of the shares in 2017 are dependent on the Nissin Foods tie-up delivering the growth promised by CEO Gavin Darby.

It was not such a good year share price wise for Greencore, falling 16.3%. While it is successfully operating in growth areas such as food to go and has reduced its exposure to its domestic market, profits in the fast-expanding US business have not come on stream as quickly as analysts were expecting, leading to concerns about the subsequent deal to acquire Peacock in November, while the resignation of CFO Alan Williams was also met with dismay as he was seen as a good foil for CEO Patrick Coveney.

Hotel Chocolat nipped ahead of Fever-Tree (which produced another astonishing year of earnings upgrades and soaring market cap - worth £1.3bn at year-end compared with its £154m float) as 2016’s star performer. Investors flocked to get a piece of the luxury chocolatier in the May IPO, pushing the valuation well past the £150m forecasts to £167m. Adam Tomlinson at Liberum says: “The company delivered on what it promised investors at IPO, with a disciplined and sensible strategy, which continues to promise much in terms of long-term growth and profitability.”

M&A activity also fuelled impressive growth for the likes of Fyffes, Punch Taverns, Total Produce and McColl’s

The savage price war had its casualties, however. Shares of value butchery chain Crawshaw were slashed 73% as deflation in the supermarket fresh meat aisles saw £328m of value lost from the sector according to The Grocer’s annual 2016 Top Products Survey). Crawshaw emerged from obscurity in 2014 as shoppers turned away from supermarkets in search of a bargain, with the stock up 200% in two years, but clearly the response from the big four has stopped the discount butcher’s momentum in its tracks.

’Sainsbury’s is more impacted than rivals by Brexit and FX’

Deflationary pressures also hurt online grocer Ocado as its basket size declined for the 12th straight quarter. The notable arrival of Amazon on the UK scene and the lack of progress in striking an international deal, yet again, contributed to the 16% fall in its share price.

As for the high street, M&S and Primark owner ABF were among the biggest losers last year. But that’s as much about the underperormance in non-food and particularly fashion, with Next, Debenhams, Dixons Carphone and Mothercare all performing poorly. New M&S CEO Steve Rowe has taken decisive action, axing 500 head office jobs, while betting big on the continued growth of the food business, and calling a halt to international expansion.Next, Debenhams, Dixons Carphone and Mothercare underperformeded markedly.

And what of 2017? Inflation is a poisoned chalice, a weak pound creates challenges and opportunities, but rising business rates, a living wage hike, the apprentice levy, political uncertainty and diminishing consumer confidence “have the potential to be a catalyst of further structural change, the like of which we have not seen since the global meltdown eight years ago,” says Nielsen head of retailer and business insight Mike Watkins.