Invest-ability daily 20/10/21: Stuck in the Middle

Two profit warnings show why its worth avoiding the squeezed middle in the household goods sector

“Price rises dipped slightly in September” was the description of the latest UK inflation figures from one prominent UK news site this morning – Newspeak in action I’d suggest as prices are still rising rather quickly. The 3.1% year on year CPI jump was in fact only slightly less than the previous month, and only lower because restaurant prices were distorted by the end of last year’s Eat Out to Help Out scheme (which as it turns out hasn’t really helped the hospitality industry very much at all). The cost of transportation, energy, food, and furniture all rose again, and CPI is expected to hit 4% in the coming months. RPI, which includes housing costs, hit 4.9% – and if, as many expect, an interest rate hike comes next month that will jump higher still.

Today we’ve seen what happens to companies who can’t outrun inflation by passing on prices to their customers, in the form of Accrol. Shares in the private-label toiler paper maker lost nearly a fifth of their value after it said that earnings would be lower than expected this year and dependent on (shudder) a strong second half. All the usual factors hit it hard – higher raw material costs, more expensive energy, and supply chain tightness. I’m sure Accrol won’t be the last company to feel the pinch, and it certainly wasn’t the first either – private-label cleaning product maker McBride said much the same thing a day earlier.

As Phil pointed out at our meeting with Signet, it’s worth being cautious about any business that sells to supermarkets. Grocers may not be the ultra-aggressive buyers they once were, but they’re still pretty powerful, and right now the battle for market share means none of them want to put their prices up. Someone somewhere has to feel the squeeze, and we’re really starting to see evidence of where that pinch point is.

Non-branded suppliers are also being squeezed from another direction – the ability of large, branded suppliers to absorb some of the inflationary pain and grab share by keeping price increases low. US household products giant Procter and Gamble said yesterday that although its manufacturing costs had risen 13% in its first quarter, it only increased prices by 1%.

That it was able to do so without really impacting its bottom line is an example of how much scale helps in the industry – more buying power over its own suppliers and more flexibility in its supply chains. And by keeping prices low it can grab market share, which means higher volumes, arguably a better route to genuine growth than price rises. Nestle, which reported its latest 9-month figures this morning, raised prices by 1.6% but reported overall sales growth of 7.6%, which means volume growth also did most of the work there.

How long they can keep that going is another matter, especially if inflation sticks around longer than some have predicted – it will be interesting to see what Unilever, whose shares are languishing close to 5-year lows, says tomorrow. Either way, branded suppliers are seen as good inflation hedges, because they have the brand loyalty to raise prices if they need to. So far, so good it seems, but managing the moving feast of inflation won’t be easy even for the big guns of the supermarket aisles, even if they can do it better than anyone else.

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