Investor appetite for Britain’s FTSE-quoted supermarkets has dipped in recent weeks as the prospect of severe sterling weakness has amplified margin concerns.
Unilever set the klaxon off in October by playing hardball with Tesco and Morrisons, the Marmite maker hiking the prices of its premier products to offset the impact of a declining pound on its manufacturing costs. Since then Walkers and Birds Eye have also attempted to hike the cost of their blue ribbon goods, and more are expected to get on board in the coming weeks and months as Brexit issues intensify.
This comes as a particular problem to J Sainsbury (LSE: SBRY) which, unlike its FTSE 100 rivals, is still witnessing an exodus of its loyal customers to the likes of Aldi and Lidl. The grocer has canned ‘multibuy’ offers in recent months to bolster the bottom line, but this measure is merely driving more of its shoppers elsewhere.
While Sainsbury’s is to be applauded for adopting such steps and attempting to build margins, the company’s failure to mitigate this programme through heavy brand investment and product quality improvements is failing to resonate with customers.
Indeed, Sainsbury’s announced last week that like-for-like sales dipped 1% during the 28 weeks to September 24, a result that prompted underlying pre-tax profits to slump 10.1% to £277m.
The London-based chain announced plans to strip even more costs out of the system to combat its flailing top line, the firm earmarking another £500m of cost savings during the three years from fiscal 2018. But much of this hard work threatens to be undone by the rising price of stocking its stores.
I reckon the company’s poor revenues picture and uncertain cost profile makes it an unsuitable pick for cautious investors.
Black gold bothers
Hopes of a much-needed supply reduction from OPEC saw investors plough back into BP (LSE: BP) and its fossil fuel peers in recent months.
Such a move is clearly a huge gamble, particularly as previous rhetoric earlier in 20106 had failed to materialise. And while an accord is still a possibility at OPEC’s meeting on November 30, the fissures running through the cartel are becoming increasingly apparent — Iraq joined Iran, Libya and Nigeria late last month in calling for exemption from any output reduction, putting further onus on other nations to take the pain.
Besides, news that OPEC production hit a fresh record of 33.64m barrels per day in October — up 240,000 barrels per day from September — arguably reveals the group’s true appetite for implementing such a deal.
With US producers also plugging their apparatus back into the ground — latest Baker Hughes data showed the rig count up by two last week, to 452 — the oil market’s weighty surplus looks set to persist long into the future.
And aside from US President-elect Donald Trump, most of the world’s political leaders remain committed to introducing ambitious decarbonisation initiatives, threatening the long-term earnings potential of oil majors like BP.
