The more things change the more they stay the same. Last year may have brought a new government to the UK and the election of a new (old?) president in the US, but the year was a familiar story of economic and geopolitical headwinds, pressure on consumer spending and new costs on business.
Another constant was Marks & Spencer being one of the standout performers in the City.
Fresh from a triumphant return to the FTSE 100 in 2023, the high street stalwart gave further weight to its dramatic recovery story as it continued to beat sales and profit expectations, sending its shares to a nine-year high.
“Sustaining pretty much double-digit sales growth in grocery has been a great achievement, all supported by opening up a customer base that was more single and older into family shoppers,” says Shore Capital analyst Clive Black.
Highs and lows
While M&S has benefitted from a number of wider economic trends – notably UK wage growth remaining strong, while consumers continue to move away from eating out – AJ Bell’s Russ Mould notes self-help measures at the retailer have kicked in to drive the turnaround.
“The acquisition in 2022 of Gist, M&S Foods’ principal logistics provider, is providing scope for synergies and cost benefits as well as helping margins.
“The clothing and home business also looks to be on a roll, after years in the doldrums. The arrival of key former Topshop executives is leading to better range, faster stick turn, less discounting and better margins for the clothing range.”
Peel Hunt retail analyst Jonathan Pritchard notes both divisions have “made a step-change in progress”.
“There is still enormous potential in both,” he says. “And if you were looking at a retailer to put your bottom dollar on for 2025, it would be M&S.”
Black also suggests there is more fuel in the tank for growth and that will drive further share price gains in 2025, though grocery growth next year is likely to be more “sedate” as tough comparatives and modest space expansion limit market share gains.
By stark contrast, M&S retail partner Ocado has had a year to forget.
Sharp share price drops saw the online supermarket lose its FTSE 100 status, and its long-awaited move into profitability remains ever-elusive as the capital-intensive business continues to burn cash.
“Ocado has always been a jam-tomorrow story, but investors seem less convinced that the jam – in terms of a sustained move into profit and consistent cash generation – is ever going to arrive,” Mould says.
Read more: What’s behind the stellar growth of Ocado Retail?
Additionally, higher interest rates have caused investors to look more closely at business’ balance sheets and financing costs, while working against valuations based on long-term growth stories.
Ocado’s surge to over 2,800p four years ago was heavily based on the global potential of its international partnerships, but investors are turning sour on those prospects as key retailers like Kroger in the US and Sobeys in Canada delay expansion plans.
Long-term Ocado sceptic Black notes: “Ocado is a very effective picker of a wider assortment of groceries that has never overcome the cost of the last mile.” He also suggests the forthcoming shift of Ocado Retail onto M&S’s balance sheet will shine a more intense spotlight on the core Ocado solutions business, and the resultant large drop in income is unlikely to boost City sentiment.
Grocery gains
Elsewhere, despite market share gains at the UK’s largest two grocers, Tesco and Sainsbury’s have had differing fortunes, with the market far better disposed to the former.
Tesco’s scale and liquidity are an in-built advantage, according to Black, but the disconnect hinges on the drag of Argos that has clouded sentiment around Sainsbury’s despite its solid grocery performance. “If Sainsbury’s can self-improve Argos, I think we’ll start to see the ratings between the two start to converge again,” he says.
Generally prospects for the grocery industry remain positive, with population growth and modest, but persistent, food price inflation laying the groundwork for sustained like-for-like sales growth and increased sales densities.
However, not all retailers are finding current conditions so supportive.
Read more: B&M faces ‘moment of truth’ after mixed results
Notably, City darling B&M Value Retail lost its shine in 2024, losing its FTSE 100 membership and around a third of its value as the market focused on weaker growth numbers and opaque forecasts.
Although B&M sales continued to rise, that was wholly driven by new store openings, with existing store sales and volumes going backwards. Additionally, City concerns on trading momentum have been heightened by a lack of guidance on sales or measures beyond adjusted EBITDA.
Peel Hunt’s Pritchard suggests the bear case may be overdone, given the negative organic growth figures are heavily influenced by very strong numbers in 2023. “Like-for-like sales is not the only game in town,” he says. “New space is very important as it supports volumes which then feed into better terms with suppliers and gross margin.”
Another retailer to fall from grace last year was Pets at Home, which was hammered in November after warning of an “unusually subdued” pet retail market.
Pritchard explains the retailer has become a victim of its own pandemic success, as booming retail sales driven by new puppies and kittens has ebbed away as pets grow up, but are not yet at an age where spending increases again.
While noting the “additional poke in the eye” from increased labour costs, he argues: “It’s still a very good business, it is just facing something of a perfect storm in terms of those pets that will drive it forwards – they will not start to need additional consumer spend for another two or three years.”
Away from retail, Greencore is one of the names at the 2024 table of grocery performers that conversely had a brutal pandemic as food to go plunged, but is now firmly on the rebound.
Under the leadership of former Morrisons boss Dalton Philips, its shares have sharply rebounded amid profits upgrades and strong like-for-like growth while expanding margins.
“Greencore has been the star performer with an improving food-to-go market and stronger operational performance,” says Peel Hunt’s Charles Hall.
“All of the leading chilled food suppliers have performed well as inflation has subsided and volume growth accelerated, and promotional activity has returned to normal levels,” he adds.
Read more: Greencore investors show continued appetite for shares
This strong 2024 performance is also reflected in other mid-cap chilled suppliers such as Bakkavor, Cranswick and Hilton Food Group, while on the ambient side Premier Foods continued its resurgence as it returned to volume growth after managing the wave of food price inflation.
On Greencore, Bakkavor and Premier Foods, Investec analyst Matthew Webb notes they also benefited from a rerating of the sector based on strong performance. “I think that in all three cases they started the year on unusually and unjustifiably low valuations, and their strong operational performance during the year has prompted the market to reassess their qualities.”
Shore Capital’s Black thinks protein supplier Cranswick, in particular, has more fuel in the tank for 2025. “Cranswick has become a massive farmer in the last decade, with a million pigs on the ground, big ambitions in poultry and no debt,” he says. “They will continue to invest hundreds of millions a year in growth, so medium-term look very well set.”
Hitting the right balance
Elsewhere there were plenty of deal-driven winners as M&A returned to the public markets, partly due to undervalued assets. Britvic, DS Smith and Finsbury Food Group all saw strong double-digit valuation gains on take-out premiums.
“Trade and financial buyers continue to sift the UK stock market – not just the consumer sector – for options, and further deals could be on the cards for 2025,” Mould notes. “Especially if the pound continues to trade well below its pre-Brexit levels.”
On the downside, DTC specialists had another battering from the stock market, with online-only consumer businesses including THG, Virgin Wines and Naked Wines amongst the biggest fallers.
THG in particular continued its unhappy experience on the public markets, as investors gave the spin-out plan for its Ingenuity e-commerce division the thumbs down following scepticism over the mechanics of the split.
Also in the doldrums was beauty player PZ Cussons, which continues to be plagued by issues in Nigeria and currency devaluation in the country. Meanwhile City darling Fever-Tree also lost some lustre as poor weather and squeezes on consumer disposable income hit sales growth and forecasts.
Read more: Fever-Tree shares lose fizz as mixer brand downgrades sales forecasts
Globally, the horror show continued for beleaguered plant-based stocks Beyond Meat and Oatly, which continued to see massive share price falls from overpriced IPOs as they struggled for growth, positive momentum on profitability and against soured consumer perceptions of the sector.
More a surprise was the world’s largest food producer Nestlé falling by double-digits in a year that cost former CEO Mark Schneider his job. His shock departure in August followed a downgrading of already weak growth expectations, which forecast the group’s weakest growth for seven years, despite the pricing benefits of inflation.
“[New CEO] Laurent Freixe needs to show he can find the right balance between protecting margins and growing sales,” Mould says. “He also needs to show he can revive the company’s product portfolio, which was seen in some quarters as having become a bit tired over Schneider.”
It was also a tough time for global alcohol giants such as Rémy, Pernod, and Heineken – and even AB InBev lost ground during the year.
Global booze players suffered from consumers increasingly trading down (in the west and key growth markets like China) due to pressures on consumers which punctured long-standing premiumisation strategies.
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