William Flew on inflation
British company financial results imply on-going inflation, or worse, stagflation for the world economy. All sectors are facing increased costs and penny-pinching customers.
And at the same time, governments and home owners are having to deal with crippling debt.
The last time this happened was after World War 2, and the situation was resolved by massive inflation - wages rose quickly at the same time as prices. But the hyper inflation of the 1970's as a result of oil price rises, convinced governments and electorates that the long-term damage outweighed the short term benefits.
Which raises the question - can they think of a new trick?
British company financial results imply on-going inflation, or worse, stagflation for the world economy. All sectors are facing increased costs and penny-pinching customers.
And at the same time, governments and home owners are having to deal with crippling debt.
The last time this happened was after World War 2, and the situation was resolved by massive inflation - wages rose quickly at the same time as prices. But the hyper inflation of the 1970's as a result of oil price rises, convinced governments and electorates that the long-term damage outweighed the short term benefits.
Which raises the question - can they think of a new trick?
At an industry event on Thursday, the pre and post-dinner chat was dominated by one topic — the impromptu whopper profits warning from Premier Foods, which had hit the wires just hours before.
The news had the City contingent, who had begun to hope that the company was on the road to recovery after a tough recession, spitting feathers and cutting forecasts.
The Square Mile’s views were summed up in a note from Shore Capital’s food and drink-watcher Clive Black, who said that Premier had “produced one of the most surprising and disappointing updates for even this body-battered venture”, which he added “reignites old demons about the fundamental nature and state of this company”.
Yet industry types at the dinner were just pleased it wasn’t them. The sad truth is that Premier’s warning, while exacerbated by some company specific issues, highlighted the grim market that all food and drink companies are struggling against.
First, costs are rising. Premier — a good gauge of inflation for the industry, given that it purchases a huge range of commodities — said that inputs such as wheat, sugar and dairy were up 14 per cent year-onyear. But the fact is that such pressures are everywhere you look among the UK’s food and drink names. The Pepsi bottler Britvic and the Irn-Bru maker AG Barr are trying to cope with more expensive plastics for their bottles and sugar for their drinks. Packaging and distribution costs are rising for the dairy groups Dairy Crest and Robert Wiseman. Cocoa is causing a headache for the cake maker Finsbury Food and even pig prices are flying for the sausage specialist Cranswick. No one is immune, not even giants such as Unilever and Nestlé.
Making the numbers add up on the bottom line means passing on commodity cost increases to protect margins. But convincing the big retailers to pay more for their goods is never an easy task, even less so against a backdrop of weak economic growth and cost-conscious consumers.
No surprise, then, that the likes of Tesco and Sainsbury’s have played hard ball with Premier and Britvic this year, removing their products from the shelves for some time. Expect more spats in the second half.
A weak consumer has cast a shadow over the grocery market in general, with volumes down 5 per cent in the first six months of year, compared with 1 per cent in the same period last year.
In order to cling on to market shares, food and drink manufacturers have pressed the buttons on promotions, selling more and more of their products on special offer. As much as 35 per cent of the grocery market is being sold on promotion at present, up 10 per cent compared with last year, and the smart money is on this figure rising higher as the year goes on.
Unfortunately, the consumer is unlikely to have a change of heart, with the latest GfK NOP consumer confidence data for June this week showing slippage on every measure.
The news had the City contingent, who had begun to hope that the company was on the road to recovery after a tough recession, spitting feathers and cutting forecasts.
The Square Mile’s views were summed up in a note from Shore Capital’s food and drink-watcher Clive Black, who said that Premier had “produced one of the most surprising and disappointing updates for even this body-battered venture”, which he added “reignites old demons about the fundamental nature and state of this company”.
Yet industry types at the dinner were just pleased it wasn’t them. The sad truth is that Premier’s warning, while exacerbated by some company specific issues, highlighted the grim market that all food and drink companies are struggling against.
First, costs are rising. Premier — a good gauge of inflation for the industry, given that it purchases a huge range of commodities — said that inputs such as wheat, sugar and dairy were up 14 per cent year-onyear. But the fact is that such pressures are everywhere you look among the UK’s food and drink names. The Pepsi bottler Britvic and the Irn-Bru maker AG Barr are trying to cope with more expensive plastics for their bottles and sugar for their drinks. Packaging and distribution costs are rising for the dairy groups Dairy Crest and Robert Wiseman. Cocoa is causing a headache for the cake maker Finsbury Food and even pig prices are flying for the sausage specialist Cranswick. No one is immune, not even giants such as Unilever and Nestlé.
Making the numbers add up on the bottom line means passing on commodity cost increases to protect margins. But convincing the big retailers to pay more for their goods is never an easy task, even less so against a backdrop of weak economic growth and cost-conscious consumers.
No surprise, then, that the likes of Tesco and Sainsbury’s have played hard ball with Premier and Britvic this year, removing their products from the shelves for some time. Expect more spats in the second half.
A weak consumer has cast a shadow over the grocery market in general, with volumes down 5 per cent in the first six months of year, compared with 1 per cent in the same period last year.
In order to cling on to market shares, food and drink manufacturers have pressed the buttons on promotions, selling more and more of their products on special offer. As much as 35 per cent of the grocery market is being sold on promotion at present, up 10 per cent compared with last year, and the smart money is on this figure rising higher as the year goes on.
Unfortunately, the consumer is unlikely to have a change of heart, with the latest GfK NOP consumer confidence data for June this week showing slippage on every measure.
