FTSE 350: Food retailers ride the inflation wave

But this competitive threat has been exacerbated in the past couple of years by the commencement of food delivery services from online giant Amazon. The conglomerate recently bought health-conscious grocery rival and fellow American import Whole Foods for £10.7bn. The new owner has been ruthless, immediately shutting two UK Whole Foods outposts in Gloucestershire and East Renfrewshire, leaving just seven UK shops remaining, all of which are in London.

But the changing landscape of the UK grocery sector doesn’t mean shoppers are losing enthusiasm for shopping at traditional supermarkets. Over the same 12-week period, UK shoppers spent a record £1.05bn on groceries. And customers are clearly keen to trade up: a record £469m was spent on premium products alone, with chilled items, fresh meat and bakery items dominating till receipts. FraserMcKevitt, head of retail and consumer insight at Kantar, also confirmed that £747m was spent on 22 December 2017 alone, making the Friday before Christmas the busiest shopping day ever recorded. 

Christmas trading updates from Sainsbury’s and Morrisons provide further evidence for these trends. The former said 22 December was the biggest sales day for its stores, and that it delivered an online grocery order to customers every second. Morrisons, meanwhile, said sales of its ‘Best’ premium range were up 25 per cent over the festive period, with this year’s broader offer proving popular with customers. 

All of this lays a strong foundation for the grocery sector in 2018. The impending tie-up between Tesco and wholesale operation Booker (BOK) will create a company of significant scale and breadth, while Sainsbury’s will continue to pursue £160m in targeted cash profit synergies from its 2016 acquisition of Argos. Don’t think this leaves Morrisons out in the cold – the group currently has a contract with online delivery specialist Ocado (OCDO) and a supply agreement with Amazon to better serve digitally-minded customers.

A word of caution, though. A recovery in grocery prices – while good for company top lines – has the potential to mask underlying trends. When transaction values rise, it’s important to watch what happens to volumes or, as supermarkets tend to report, the average number of items per customer basket. For instance, in Ocado’s last trading update at the beginning of December, the group reported an 11.6 per cent rise in retail revenues. But average order sizes were in fact flat, at an average of £106 apiece. Similarly, Morrisons reported a 2.3 per cent improvement in the number of transactions over the 10-week period ended 7 January 2018, but the number of items per basket is still down by 4.4 per cent on an underlying basis.

From this, we can deduce certain patterns: grocery customers are choosing to shop more often but for fewer items at a time. And if price inflation wasn’t part of the equation, this would have a null effect on supermarkets’ financial performance. But higher prices mean sales inevitably look better in value terms. The question, of course, is how well they absorb costs and the impact better sales are actually having on profits.

Finally, the recent ‘cauliflower steak-gate’ at Marks and Spencer (MKS) speaks to a wider message currently dominating the industry: environmental impact. A potential 25p levy on disposable coffee cups is under debate, while the 5p charge on plastic bags has now been rolled out nationally across all shops. Could further packaging regulation be on the way? If so, it’s set to be another year of regulatory upheaval for Britain’s supermarkets and food-to-go specialists like Greggs, whose value formula is resonating with shoppers and shareholders alike; its valuation leaves little room for error.