Supermarkets like FTSE 100-listed Tesco (LSE: TSCO) have long been known for their low profit margins. As we move into 2023, their ability to make healthy earnings looks as precarious as ever.
Today the British Retail Consortium announced that food price inflation hit a record high of 11.6% in October. The body’s chief executive, Helen Dickinson, announced that food values soared due to “the significant input cost pressures faced by retailers due to rising commodity and energy prices and a tight labour market”.
Prices of staples like wheat, corn, and seed oils remain at elevated levels as the war in Ukraine drags on. And they are in danger of rocketing further in 2023. At the same time, staff costs at Tesco are rising due to worker shortages.
In late October, Aldi raised staff wages for the third time this year. The rush for labour is turbocharging wages across the sector.
Cheap but risky
The trouble for Tesco, however, is that it can’t effectively pass these costs onto customers. People are increasingly cutting back on even food and essentials as the cost-of-living crisis bites.
The increasingly competitive environment is also limiting the supermarket’s ability to pass costs on. The discount offerings from Aldi and Lidl mean Tesco must maintain low prices to stop revenues crashing.
And the fight is intensifying as these low-cost retailers rapidly expand. Lidl alone plans to have 1,100 stores in operation in Britain by 2025. Rumours also abound that these firms could make an entry into the online grocery sector (Aldi is currently developing an e-commerce platform in the US).
I like Tesco because of its own terrific online operation. Huge investment here could pay off heroically as online grocery shopping catches up with the broader e-commerce boom.
But this isn’t enough to encourage me to invest. Today, Tesco’s share price trades on a low price-to-earnings (P/E) ratio of 10.4 times. It’s a low valuation that reflects the wide range of risks it faces.
Another FTSE 100 trap?
BP (LSE: BP) also offers excellent value for money on paper. In fact, this FTSE 100 value stock trades on an even-lower P/E ratio of 3.7 times for 2022.
However, as someone who invests for the long-term, I’m avoiding fossil fuel companies like this. The transition from oil and gas to renewables and alternative fuels is rocketing, and BP is in danger of being left behind.
The International Energy Agency recently labelled the war in Ukraine “an historic and definitive turning point” in the move to low carbon energy sources. It now reckons natural gas demand will peak by the end of the decade and oil consumption will reach its zenith “in the mid-2030s”.
Near-term risks
BP is investing heavily in renewables and alternative energies to capitalise on the clean energy revolution. This could help it to generate decent profits in the decades ahead. But I fear the costs and execution risks of this strategy are too high.
In the meantime, BP profits could disappoint as the global recession picks up and the threat of a British windfall tax grows. I’d rather buy other FTSE 100 shares today.
