clive black quote web

The combine harvesters of the northern hemisphere are being greased up for the long wait until they scythe through the fields next year. Farmers of the north have, once again, excelled themselves in output.

Already well-filled silos shall remain so for the foreseeable future. Accordingly, most agricultural commodity prices will remain somewhat depressed.

With crude oil prices also in the doldrums, the sideways pressure on input prices is all the more accentuated, leading us to expect little food price inflation in the UK for the next six, nine, maybe 12 months.

The first base for a reappraisal of this assertion will be coming with the spring plantings data. A return to food price inflation needs a shock to the system in the near term: a crop failure, a spike in oil prices, a plunge in sterling - all of which are impossible to accurately predict, and feel unlikely.

On top of this, there is the matter of the ongoing price war among British supermarkets - and ‘price war’ is an appropriate term to characterise the industry at this time, after much wolf crying, as superstores seek to regain price credibility with the currently rampaging limited assortment discounters (LADs). The ongoing shelf-edge pricing activity is also likely to compress basket prices and so supermarket gross margins in the near term at least.

Additionally, the supermarkets, and their supply chains face the challenge of the Chancellor of the Exchequer’s National Living Wage from April 2016, plus ongoing detrimental changes to those operating large real estates from changes to business rates. All these pressures mean driving sales growth and supporting profit margins is becoming more difficult rather than easier for grocery bosses, leading us to prepare investors to be patient before any uptick for domestic supermarkets can be envisaged.

Questionable management ultimately created the problems facing the major superstore players and it can only be effective management that guides to a brighter place for all stakeholders. If there is a silver lining to this dark cloud, it is that the sector may have better captains now on the bridge.

Clive Black is head of research at Shore Capital Stockbrokers

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