Justin King is being conservative: the only way prices can go is up

Not many ex-supermarket CEOs have escaped the upheaval of the last few years with their reputations intact. Justin King is one of them.

Former peers include Phil Clarke (Tesco 2011-2014), Dalton Philips (Morrisons 2010-2015) and Andy Clarke (Asda 2010-2016). All were fired for failing to cope with the intense pressures brought upon them by the global financial crisis, the increased competition between them, new competition in the form of the discounters, and more.

King left Sainsbury’s in 2014, earning him the nickname ‘Justin Time’ for leaving just before the wheels fell off, à la Sir Terry Leahy. And it’s true that King departed just as an impressive run of 36 straight quarters of like-for-like sales growth ended with a sales dip the moment he handed over to Mike Coupe. It’s been up and down for Sainsbury’s ever since.

But regardless of the timing of his exit, which Coupe insisted had been planned well in advance, King’s reputation is built upon the fact he left Sainsbury’s in dramatically better shape than the operation he inherited. So when King talks, people in the industry listen. Like last night on Newsnight (flick to 24:38) when he predicted that supermarket prices would rise by 5% in the wake of Brexit.

There is nothing particularly new in this. Plenty of wise heads – including King, a relatively vocal Remainer – warned it would happen long before the referendum took place. It’s the predictable consequence of Brexit having a negative impact on the value of sterling, which will inevitably lead to price inflation at home, while anything purchased from abroad will cost more. It’s incredibly simple, which is why it flew straight over the head of so many Brexiteers.

The interesting detail is that 5% figure, a number that King arrived at using an admittedly rough and ready methodology, which, frankly, is as reliable as anything else under the circumstances.

Still, it errs on the conservative side. Certainly FDF chairman Ian Wright, another knowledgeable man who is, at times, refreshingly unconservative, expects price rises to hit up to 8%.

The worrying thing for everyone involved is that it will likely be more.

Not least because suppliers are feeling the pinch and looking to pass it on. Unilever demanded a price hike of twice as much as King’s estimate during Marmitegate, a blanket 10%.

“Raw material costs have gone up massively,” Richard Canterbury from Love Smoothies told Newsnight, while slurping on an opportunistic smoothie. “We buy all our raw materials in dollars or euros. We don’t want to pass it on, but we can’t absorb everything either.”

And Brexit is by no means the only factor that will see the supermarkets lose their fingertip grip on the price points they have fought so hard to keep or cut over the last couple of years.

Deflation caused by the grocery price war is the big one. Already raging long before Brexit, November’s Grocer Price Index (GPI) shows annual deflation increasing to -1.71% from -1.64% last month, having peaked at -3.07% in the month to 1 June.

Deflation is inherently unsustainable, even for the discounters, which this week allowed the price of four pints of milk to creep back up from 95p to 99p. The very fact four pints of milk retailed for 95p in the first place demonstrates that margins are, in many cases, veneer-thin, non-existent, or negative. So even without the added pressure applied from Brexit, deflation means the only way for prices to go is up. Combined with Brexit, 5% starts to look less conservative and more optimistic.

The “best run business will be okay,” added King. “But those already stretched will suffer” after being “squeezed in the jaws of not being able to pull up prices, while costs continue to increase”.

Both will happen in the next 12 months. So King was asked: “Will a familiar high street name disappear?”

“For sure it will happen,” he replied. “I just can’t tell you which one it will be.”

Perhaps a high street name disappearing is, as he indicates, inevitable. It would have been more interesting to hear whether King thought one of the big supermarkets might be in peril, and if so which one.

He’d never namecheck Sainsbury’s. The discounters are slowing down almost as rapidly as they accelerated, but remain relatively comfortable, as does Waitrose. And Tesco, Morrisons, Iceland and the Co-op are all showing strong signs of recovery.

I wonder what King thinks about Asda?

Whatever happens, it’s going to be a tough 2017 all round, for suppliers and retailers. Because the upheaval of the last few years isn’t going anywhere for a while yet.