The Associated British Foods (LSE: ABF) share price fell 10% in early trading today (10 September) after it released a key trading update, ahead of full-year results later in the year. The FTSE 100 firm owns a motley collection of businesses across retail and grocery.
I view the health of the company as a bellwether for the wider UK economy. So, could it be signalling that tough times are ahead?
Primark
Accounting for 50% of the group’s revenue, Primark is the business that I watch most closely. One of the primary reasons why I bought the stock was a belief that its brand would resonate with consumers in the middle of a cost-of-living crisis. However, it would seem that even retailers at the lower end of the price spectrum are not immune to a consumer squeeze.
In H2 that ends in a few days’ time, the retailer is expecting sales growth to be lacklustre at 1%. Like-for-like sales are expected to come in around 2% lower than the same period last year.
However, there were some big disparities across different regions. In Central and Eastern Europe sales are expected to increase 9%, and in the US by 23%. But these account for a tiny fraction of total sales.
The UK is by far the most important region. Here, sales are expected to grow 1% in H2.
Consumer squeeze
It is easy for the retailer to blame macroeconomic factors for stuttering sales. I mean, what retailer out there is not struggling at the moment. But is it the only factor?
Back at H1 results, a sales decrease of 4%, led to Primark’s market share reducing from 6.9% to 6.7%. According to the latest figures from Kantar, it currently stands at 6.8%.
An unusually mild autumn last year was blamed for a poor set of numbers in H1. But with one of the hottest and driest spring and summer on record, I would have expected buoyant consumer shopping. Could it be that the consumer is falling out of love with a brand because of its limited online offering?
Click & Collect has finally reached all its 187 UK stores. But for me it is very difficult to assess the extent of its success in driving footfall into its stores.
Other businesses
One of the attractions of ABF (as it’s known) to me is that even if one part of its business is underperforming others get the opportunity to shine. Unfortunately, it looks as though Primark’s woes could be contagious.
In grocery, the picture looks mixed. Allied Bakeries, which manufactures Kingsmill bread, has been a loss-making business for some time, with the rising prominence of speciality breads. An expected merger with rival Hovis is a sensible move.
Many of its brand continue to perform well, though. This includes Twinings Tea and Ovaltine, in response to marketing and product innovation.
Bottom line
I continue to believe that the UK is heading for a recession. Indeed, I would not be surprised if we are not already in one.
The consumer has long tapped out and that has undoubtedly hurt ABF sales. I own the stock and will not sell because it is a well-run, conservatively managed business. But I am certainly not in a rush to buy more any time soon, either.
