Stock markets favour retailers – it's producers that'll suffer post-Brexit

It is a truism that the UK is unusually and increasingly dependent on food imports and immigrant labour in our food factories and farms (Defra). Our self-sufficiency has fallen from 75% in the mid-90s to 60% today. In pig meat products the UK is even more dependent – only 45% of our pork, bacon and sausage needs are locally produced.

It is also true that in fresh food we are a day or two from food shortages last seen in wartime should borders fail to function on 30 March 2019.

So we should be concerned, right?

The UK food industry is floating on a sea of uncertainty and divergent opinions about what kind of Brexit we voted for (or now want) and what negotiating mandate, if any, we have given our political leaders.

But one thing is abundantly clear: any negotiated Brexit deal can only be bad for the availability and price of our food. The only question is: how bad?

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So what can we learn from the behaviour of the stock markets and what message, if any, are they sending?

Early in 2016 all was doom and gloom when RBS cried “sell everything” on the back of Brexit and other uncertainties.

So what’s happened since the vote? Firstly, the immediate market reaction was to buy exporters and sell UK domestic businesses (typically mid-market) as the pound fell by 11% overnight. The FTSE100 roared ahead after the vote, along with it the quoted UK food retailers and UK food manufacturers.

Today, despite a horrible October in the stock markets, the FTSE100 Index is still up 13% since the Brexit vote and the broader (more local) FTSE350 is up by 12%. The French CAC Index is up by 12% and the German DAX Index up by 19%. So in general the stock markets seem sanguine about the broader impact on UK business.

Twenty-nine months later, what’s happened in food manufacturing and retailing? We have clear signs of labour shortages in factories and on farms as immigrant labour loses faith in the outcome of Brexit (and pays the price of a weaker pound). At least some shortages on the shelves result from this: Christmas 2018 will be another severe test of our food supply chains.

We have had a significant inflationary jolt on input costs (10%-15%) but not enough retail price inflation to see the supply chain get its money back. Consumer confidence is weak and the high street is seeing increasing failures. Total profits in the UK food supply chain are at 10-year lows.

A representative basket of UK food retailers has actually seen share prices rise on average by 30% since the Brexit vote, far outperforming the UK market as a whole. This is despite M&S falling by 17%. A representative basket of EU-zone retailers has seen share prices fall by 7% since the vote: Carrefour for example has fallen 21%.

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So despite these adverse trading conditions, heavy discounting and loss of share to German-owned discounters, the stock market seems positive on food retailers.

It is the UK food producers who have suffered since the Brexit vote – sandwiched as ever between price pressure from retailers, rising input costs and combined labour shortages. Overall share prices have fallen 4% since the vote, a 15% underperformance against the UK market and a 26% underperformance against UK retailers, their customers.

But if you look at individual businesses the picture is more complicated. Both Hilton and Cranswick have not only outperformed the UK market as a whole, they have outperformed their retailer customers. Meanwhile businesses like Premier Foods, ABF, Diary Crest and Greencore have underperformed heavily (although Greencore’s performance has been heavily driven by its now-exited US business).

It seems that the stock markets are looking behind the simple Brexit risks and assessing the longer term strength of businesses such as clarity and consistency in strategy, leadership and execution.

Perhaps that is the main takeaway: management can only manage their own business and those who continue to execute consistently on a clear and sensible strategy will be rewarded both today and after any Brexit settlement.

Steve Francis is ex-CEO of Tulip