“We entered the quarter with deflation and exited the quarter with inflation,” declared Mike Coupe, chief executive of Sainsbury’s, describing shop prices in the most recent trading period. Once upon a time, this would have been taken as excellent news for shareholders, as opposed to customers. Inflationary breezes, allowing prices to be raised faster than overheads, used to be a supermarket’s best friend and surest way to protect profit margins. Not now.
Coupe didn’t give a figure for price inflation at Sainsbury’s, but it is unlikely to be as high as he – and his competitors – would wish. Industry consultant Kantar put the rate at 1.4% last month. That was double the rate in the previous month, but we’re not talking about the 5% within six months that his predecessor, Justin King, forecast four months ago for the entire industry.
King’s argument was that, since 40% to 50% of food in supermarkets is imported, a 5% increase in prices would be required to compensate for the 10% fall in the pound since the referendum. King’s figure will almost certainly arrive in time, one suspects, but not within his six-month horizon. Instead, supermarkets are having to take much of the inflationary hit on the chin.
As Coupe said: “The market remains very competitive and the impact of cost price pressures remains uncertain.” Put another way, discounters Aldi and Lidl – who weren’t forces in the land during previous sterling devaluations – lie in wait for any supermarket that thinks it can help itself to a currency-inspired price rise. Supermarkets’ share prices, becalmed as the overall stock market marches upwards, tell the story. Inflation was great for supermarkets only when competition was weaker. Life has changed.
In Sainsbury’s case, the acquisition of Argos, where like-for-like sales rose 4.3%, looks smarter by the month. The timing was sound. But the supermarkets, where sales were flat, are on a tough treadmill.
Energy has enough power to take the pain
Those MPs who spent Thursday beating up the big energy suppliers in parliament may also note the supermarkets’ experience. In the electricity and gas market, price increases are being blamed on different factors – rising wholesale prices and the cost of programmes to upgrade infrastructure – but the seemingly mechanical nature of the hikes is striking.
Even if one concedes (many wouldn’t) that the energy market is competitive, it would be hard to argue that it’s as competitive as food retailing. It is a point the government, preparing a green paper on protecting the interests of consumers, may care to make when the Big Six next protest that their price rises were forced by factors beyond their control. It is not against the rules to counter those forces and take a bit of short-term pain yourself.
Balfour Beatty tastes benefits of reconstruction
In 2014, Balfour Beatty was deemed in some quarters to be such a mess that a takeover by rival Carillion would be an act of mercy. Balfour had issued umpteen profit warnings and Carillion, lobbying for an all-share deal, was regarded as the sector’s slickest operator. Three years on, Balfour’s shareholders should give thanks the takeover didn’t happen. Their company’s recovery continues while Carillion’s share price has sunk by a third.
It would be exaggeration to say Leo Quinn, the outsider recruited to cure Balfour’s many ailments, has completed the task. Even in a low-margin business like construction, making an operating profit of £67m on revenues of £8.5bn does not count as success. But it is true that a dose of common sense, after Balfour’s grim chapter of over-bidding for contracts, has made a difference. Quinn pledged to improve the cash position by £200m in the first two years while removing £100m of costs. In the event, he reported £439m and £123m respectively.
The way he tells it, the trick was to make 45 businesses, accumulated during Balfour’s old acquisition spree, into one. “A federated culture had resulted in layers of unnecessary cost and a tendency for elements of the business to compete with one another,” he says. Balfour now has one IT director instead of 14.
True success will arrive only when Balfour delivers the “industry standard” profit margins Quinn talks about. The target is by the end of next year. If standard means 2.5%, profits would pass £200m on current revenues, which would be a proper improvement. The morale of the 2014 episode seems simple. In a business such as construction, where contracts rarely run for longer than two or three years and the poison can flushed out of the system quite quickly, it is usually better to fix a troubled business than to sell it in a weak moment.
