Christmas food inflation to put Morrisons in ‘tricky position’: city

By Anne Bruce

- Last updated on GMT

Rises in food inflation could put Morrisons in a 'tricky position'
Rises in food inflation could put Morrisons in a 'tricky position'

Related tags Morrisons

Food inflation will be “well on its way to 4%” by Christmas, and manufacturers need to prepare to put up their prices – with Morrisons particularly in “a tricky position”, warn analysts at Shore Capital.

A surprise fall in new inflation figures, down 0.2% to 2.0% year-on-year for September 2012, according to the latest UK consumer prices index, did not indicate the shape of things to come.

Analyst Darren Shirley told FoodManufacture.co.uk that higher food inflation was on its way, and was unlikely to end until there was “visibility on next year’s harvest​” in early next summer.

Sainsbury’s financial director John Rogers had talked of the potential for a 4% rate by the first quarter of 2013 in the firm’s second quarter trading update on October 3, Shirley said. 

Inflationary pressures

As we head toward Christmas, food inflation is likely to be well on its way to 4%,” ​he said. “The driver included the poor harvest in the northern hemisphere, which is impacting on wheat and corn ​[maize] prices. An abundant harvest in the southern hemisphere might take the edge of things, but it will be early summer and depending on the next harvest, until we see the inflationary pressures easing​.”

Manufacturers would have to recover input costs without too considerable a time lag, he said.

“Such recovery is likely to be as challenging as ever, though with the quality of much of the quoted sector materially better than in the past,”​ said Shirley. “From a management, operational and balance sheet perspective, we would expect price recovery to be achieved in due course.”

Manufacturers were also in a more favourable position than several years ago, as there were fewer of them, so retailers could not switch their business to a rival company as easily.

Some retailers might choose to “pare back”​ inflation by absorbing some of the cost increases themselves, he added.

But retailer and manufacturer Morrisons was in a more tricky position, as its own manufacturing margins would be hit by inflation.

This could hit Morrisons​’

“This could hit Morrisons − both on volume decline and in reduction in manufacturing margin.”

While it would be able to pass on its manufacturing cost increases readily to the end-consumer, whether Morrisons chose to do so was a different matter. That might depend on what other retailers did, he suggested.

The Office of National Statistics (ONS) suggested bread and cereals inflation was 0.4% down in September, to 1.1%, which Shore Capital dismissed as a “blip”.

Shore Capital said in a note: “We remain firmly of the opinion that inflation in the category will build through the fourth quarter, potentially to the mid to high single-digit level, if not serious pressure will be being applied to already constrained industry margins​.”

Meat inflation was up 0.7% to 2.3%, the ONS said. Milk, cheese and eggs saw -0.5% deflation in September (from -1.5% in August). Vegetables were up 1.1% to 2.8%. Fruit inflation was down 3.3% to 0.7%.

Meanwhile, sugar, jam, syrups, chocolate and confectionery fell back 1.3% to 3.4%. Fish saw a 2.2% decline to 1.9%, reversing an August increase.

Oils and fats saw 3.8% reduction in prices reported, as deflation in the category continued.

Alex Waugh, director general of millers’ trade body the National Association of British and Irish Millers, told FoodManufacture.co.uk: “Grain prices are up year-on-year and the structure is such that I don’t think they are going to fall before the next harvest​.”

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