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Yesterday, the Office for National Statistics (ONS) released inflation data for the 12 months to the end of February. Immediately after the market opens, at least FTSE 100 stocks began to fall.
Investors don’t like surprises, and are especially nervous about rising prices. Economists expect a figure below 10%. However, ONS figures show that the annual inflation rate has increased from 10.1% to 10.4%.
What is the problem?
Inflation destroys the value of cash. This lowers the standard of living and leaves individuals with less income.
No wonder Ronald Reagan, former US President, said: “Inflation is vicious like a robber, terrifying like an armed robber and deadly like a raider.“.
But despite the unexpected rise in inflation rates, I think there are two members of the FTSE 100 that are well-positioned to deal with the challenges it brings.
Check these two out
In January, two Tesco and J Sainsbury trading update released.
In the 19 weeks to 7 January 2023, Tesco announced a 7.9% increase in like-for-like sales. For the 16 weeks to the same date, Sainsbury’s recorded a 5.9% increase in turnover. Both figures do not include the impact of fuel.
With inflation remaining high, supermarket profits will continue to grow. But wise old accountants know that turnover is profit and profit is sanity. The most important thing.
Both supermarkets are raising prices because they have to pay more for the products they sell. This is best illustrated by looking at the latest accounts of Unilever. The company sells more than 400 well-known brands to retailers. In 2022, the sales volume will decrease by 2.1%, but it can increase the value by 11.3%.
On the rise
But I think the earnings of the UK’s two biggest grocers will rise.
With household incomes depressed, shoppers are looking for cheaper brands. This is good news for Tesco and Sainsbury’s, which have many own-label products on sale. This profit margin is higher than the goods bought by, for example, Unilever.
Most economists expect inflation to fall sharply by the end of the year. But this means that prices are still rising, albeit more slowly. I doubt we will ever see grocery costs return to the levels seen a few years ago.
High prices are here to stay. But some supermarket overheads have to fall.
Gas and electricity account for about 12% of the store’s operating costs. And wholesale energy prices are now retreating from their recent highs. This will soon feed through to the bill and increase the earnings of the supermarket.
The combination of automation and increased efficiency means that staff costs as a proportion of profits should continue to fall.
Verdict
In the face of competition from discounters, Tesco and Sainsbury’s seem to hold their own. The market share of both is almost the same as two years ago.
Selling groceries is a tough business – every £1 of sales contributes less than 2p of profit. However, I would love to include one of these stocks in my portfolio.
Unfortunately, rising inflation has put financial pressure on me, meaning that I currently have no money to invest.
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