FTSE 350 Review: The supermarket stocks protected against inflation

While events in the Red Sea may complicate this narrative, the current dynamic is welcome news not just for customers but arguably the companies themselves, who have been confronting the question of how to balance cost increases with price rises. Some think this balance has tilted too far in the latter direction: the Competition and Markets Authority (CMA) has been investigating whether the UK supermarkets have used inflation as a fig leaf to price gouge. 

You may also have noticed your local supermarket listing two prices on many items, a cheaper one for loyalty card holders and a more expensive one for other customers. The CMA has its concerns here too, and has launched an investigation into the practice that will begin in “early 2024”. Tesco’s (TSCO) Clubcard and Sainsbury’s (SBRY) Nectar card, as the two highest profile schemes, will be under particular scrutiny.

Price rise and loyalty card strategies were responses to inflation and supply chain issues that might soon be a thing of the past. But the big players may not mind the latest state of affairs: historically, expansion of supermarkets' wafer-thin margins (and those in the more profitable food production sector) has proved easier not when prices are rising, but when falling input costs enable companies to keep more for themselves.

On top of this, lower inflation could encourage shoppers to spend, which is likely to benefit the food retailers even if the UK tips into a recession this year – the possibility of which is still up for debate. That does not mean all supermarkets will be recession-proof. Marks & Spencer (MKS) and Ocado (OCDO) tend to stock the high-ticket items on which many shoppers cut back when recessions hit.

Ocado, like all food retailers, is also waiting to see what ‘normal’ online grocery shopping trading conditions look like. Online shopping boomed during the pandemic. Since then, the UK has seen rampant cost of living pressures. If these ease, we might finally learn how much Britons like to buy food over the internet in a non-recessionary, non-inflationary, non-pandemic period. 

Whatever the 'new normal' may look like, it matters because the vast majority of food shopping still happens offline. On a seasonally adjusted basis, internet grocery retail sales accounted for just 9 per cent of total grocery retail sales in November, while internet retail sales generally accounted for 26.6 per cent of total retail sales. 

Online grocery shopping growth is also much slower than total online shopping growth. In short, we might reach market penetration here sooner than some think. For those with physical stores, that won't prove such an issue.