Feeding inflation
FINANCIAL TIMES Published: January 14 2008 09:29 | Last updated: January 14 2008 10:12
The contrast between Marks & Spencer¹s disappointing third-quarter results last week and Sainsbury¹s and Metro¹s upbeat reports begs a question: Will the fortunes of general retailers and supermarkets diverge significantly in the coming year? Investors seem to think so. Just a year ago, European general retailers were trading on higher price/forward earnings ratios than food retailers. Since then the p/e for food and drug retailers has slipped only slightly to 17 times, while general retailers have fallen sharply to
Clearly, food retailing has advantages in a recession. Consumers can delay replacing handbags and televisions, but they have to eat. In the US, though, the spread between general and food retailers is narrower, even though economic conditions are worse. There may indeed be uniquely European reasons to be optimistic about food sellers. According to Citigroup, there is a strong correlation between food price inflation and food retailers¹ relative p/es, despite the fact that any boost to sales from inflation rarely feeds through to the bottom line. By contrast, US consumers have already absorbed
European companies also benefit from wider acceptance of private label brands, which have higher margins and, when properly differentiated, can retain customers¹ loyalty even if they spend less. House brands make up only a fifth of US sales, half the level in the UK and much of Europe, according to consultancy Planet Retail. Counterintuitively, the recent push into non-food items, which carry higher margins, could also help chains like Sainsbury and Tesco, which reports on Tuesday. Pinched customers may pick up clothing, for example, there rather than making a second trip to the high street. Wal-Mart and Costco have benefited from a similar trend in the US.
These advantages, though, can only do so much. There are genuine reasons for believing European food retailers will have a better time in 2008 than their general merchandising rivals, but their defensive charms are already well appreciated.