Who would have thought that the first casualties of the Brexit vote would be PG Tips and Marmite? Yet this week we had a 24-hour stand-off between Tesco (TSCO) and Unilever (ULVR) that will have serious implications for supermarkets and their suppliers.
Supermarkets have a history of squeezing their suppliers – sometimes into the ground - especially when, as now, there is a price war in full swing. Few suppliers are big enough to stand their ground and risk losing their biggest customers. Unilever is an exception.
Details have not been disclosed but the Anglo-Dutch household goods manufacturer apparently demanded a 10% price increase. Supermarkets do not like that. They like to dictate terms.
Even Premier Foods (PFD), maker of branded products such as Oxo, Batchelors Soups and Sharwood sauces, has a weak bargaining position. Its trading update this week showed sales down 5.4% in the 13 weeks to 1 October, with the grocery division down a whopping 9.5%.
Premier blamed the warm September for the poor showing in what is the company’s second quarter and promised that profits for the full year to the end of March would be up to expectations because of “careful management of costs”. Nonetheless, first half profits will be down on last year so Premier is counting on a better second half.
I don’t like companies blaming the weather, and cutting costs is rarely a satisfactory substitute for increasing sales. The decision to reject a takeover offer six months ago from American spice giant McCormick looks ever more foolish and I can see no reason for holding the shares, which fell below 50p on the update - and could fall further.
Unilever is made of sterner stuff, with underlying sales growth of 3.4% in the third quarter of 2016, but even so, the gain was down to price increases rather than selling more and growth also tailed off compared with the first half.
The shares have done well over the past 12 months and although they fell back on the update they look better value than Premier.
However, the spat with Tesco was a game of bluff that is potentially damaging for both sides. Unilever’s argument is that the fall in the value of the pound has raised manufacturing costs in this country because imported ingredients cost more. Unilever products disappeared from the Tesco website with remarkable speed, driving shoppers to rival products and rival supermarkets.
We don’t know what compromise was struck because if, as one assumes, Tesco has given ground other suppliers will demand similar price increases. As the fall in the pound shows no signs of abating, this battle may well be fought with various protagonists over and over again.
Will Sliding Pound Favour Defensive Stocks?
There is no doubt that the vote for Brexit has triggered the latest slump in the pound but it is not the root of the problem. The hefty balance of payments deficit was unsustainable and was being funded by inward investment. In effect, we were selling British assets to allow us to live beyond our means.
London-quoted share prices have largely offset the fall in sterling, which means shareholders have effectively been shielded from the pound’s discomfort.
That does, however, make picking investments particularly tricky. My inclination is to go with defensives rather than cyclicals and to favour companies with heavy overseas earnings that will translate into more pounds from now on.
Encouraging Departure for WH Smith
At long last the unjustified slide in shares of WH Smith (SMWH) has been reversed thanks to another encouraging update. Perhaps I’m biased because I hold shares and am aggrieved that I am nursing a loss on them but the policy of expanding at stations and airports while cutting back on the High Street continues to deliver improvements.
Results for the year to the end of August showed sales up 3% and profits up 8%. The dividend total is 11% higher than last year. The shares are still down £3 since they peaked at 1878p in early April. They should recover more ground soon.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
