In 2023, crises from Ukraine to the Middle East, plus the ongoing cost of living crisis, battered stocks. Who coped best and what will 2024 bring?
Grocery has grown used to volatility and uncertainty in the wake of Brexit, a pandemic, global conflicts, soaring costs, high interest rates and a never-ending cost of living crisis. And despite the ongoing hardships, 2023 represented something of a recovery for most – in terms of the stock market anyway, after many share prices took a battering in 2022.
Marks & Spencer, perhaps, epitomised that recovery story best as it fully cemented a turnaround in the food business and, even more impressively, on the once-troubled fashion side.
The high street bellwether delighted investors with a surprise profit upgrade over the summer and the subsequent boost to its share price saw M&S return to the FTSE 100 in August after being dumped out of the blue chip index back in 2019. M&S Food was also crowned Grocer of the Year for the first time in its history at the Grocer Gold Awards, with CEO Stuart Machin bagging the Grocer Cup.
“From a stock market perspective, M&S has absolutely been the star of the show,” says Shore Capital’s Clive Black. “The food business is benefiting from a really strong assortment, and they’ve got the benefit of new stores coming through, which a lot of their competitors don’t have. And on the clothing side, they’ve had almost a perfect year with very high levels of full-price sales and very little markdown or promotion.”
Tesco and Sainsbury’s also enjoyed a large bounce back in terms of share price, which, as Bernstein analyst William Woods points out, took a big hit in 2022 in the fallout from the political and economic catastrophe that marked Liz Truss’s short tenure in 10 Downing Street.
Woods adds that sustained high inflation also helped the listed grocers more generally, as hard-pressed consumers had little choice but to continue shopping. “Relative to suppliers, the food retailers managed to capture some of the benefits of the cost of living crisis,” he says.
“People still need to eat, and retailers have both private label and brands. They capture a lot of spending that some suppliers lose out on in terms of volumes. As a consumer, if I’ve got a choice between a branded butter at £5 and own label that’s 30% or 40% cheaper, I’m going to buy the private label one.”
Black also highlights the strength of the Sainsbury’s and Tesco balance sheets compared with more heavily burdened, private equity-owned rivals and how that has allowed them to compete better on price with the discounters and win market share. “They’ve also really started to harvest the benefits of those Clubcard and Nectar loyalty programmes,” he adds.
Discounters come out on top
B&M was another beneficiary of the cost of living squeeze on shoppers, and markets were impressed with Alex Russo’s first full year in charge after he took over from Simon Arora at the end of 2022, capped off by “pleasing” Christmas results.
But the year’s biggest riser – McBride – underscored the story of shoppers trading down from brands to own label. The cleaning products manufacturer saw shares surge almost threefold to put a horrid 2022 firmly in the past.
“There was a lot of concern about the level of gearing in the business and the ability to rebuild margins,” says Charles Hall, head of research at Peel Hunt. “But what’s really been shown is it managed to push through the price increases required, and the upside has been magnified by the strength of the private label market.
“McBride is absolutely benefiting from that in terms of volumes. The combination of improved pricing and stronger volumes is rebuilding margins and turning into strong cash generation, which is enabling it to reduce leverage and rebuild covenants. McBride ends the year in a much stronger position than it started 2023.”
On the flip side, it was a testing year for the big, branded consumer packaged goods giants, who hiked prices considerably to protect margins at the expense of volumes. Shares at Unilever remained weak, with investors obviously missing the memo about greedy corporations ripping off consumers in a profiteering scandal that wasn’t. The reality is new CEO Hein Schumacher is already under pressure as the City awaits signs of his turnaround strategy working.
“There’s probably been too much of a focus by tier one fmcg groups on cost recovery and margin protection over good customer insight and understanding their markets,” Black argues.
AJ Bell investment director Russ Mould also highlights how high interest rates played a part in investors’ evaluation of stocks.
“Higher returns on cash and higher government bond yields made those asset classes relatively more attractive when compared to equities,” he adds. “This meant investors were less inclined to pay very high multiples of earnings for ‘safe’ or ‘reliable’ earnings streams, [as] offered by powerful consumer brands.”
In contrast with the global players, Black says Premier Foods “hasn’t missed a beat” as it successfully managed input cost inflation through price increases and internal levers to gain market share in the face of a strong private label market. “That’s been an outstanding achievement, which shows you the high quality of Premier’s brands, its excellent customer relationships and its really good execution,” he adds.
“The food retailers managed to capture some of the benefits of the cost of living crisis”
Brand loyalists save soft drinks
UK soft drinks suppliers also held up better as consumers stayed loyal to brands. HSBC analyst Doriana Russo says brand pricing power and active revenue management more than offset lower volumes, helping revenue growth and underpinning solid operating margins.
Britvic performed best, with overall strong results, but Fever-Tree was held back by more volatile demand thanks to its on-trade exposure, while AG Barr’s share price suffered from the retirement of long-standing boss Roger White, Russo adds.
Share price weakness coming into 2023 also made food and drink business vulnerable to takeover bids. Hotel Chocolat shares were languishing around the 100p mark – way down on highs of more than 500p in late 2021 – thanks to profit warnings and costly retreats from international markets.
Turbulent times for food processors
Asset management firm DBay Advisors also spotted a bargain as it took bakery group Finsbury Food private, while beleaguered THG saw a healthy recovery in its share price on the back of a takeout bid by private equity firm Apollo. That bid ultimately ended in failure, but activist investor Kelso continues to agitate for a break-up of the group.
Elsewhere, there were also healthy recoveries for food-to-go supplier Greencore and meat processor Hilton Foods. New Greencore boss Dalton Philips will now focus on rebuilding profitability at the sandwich maker, while fresh leadership at Hilton in the form of Steve Murrells is expected to see the group move from stabilisation to growth in 2024.
It was a more mixed year for delivery businesses Deliveroo and Just Eat Takeaway, which Woods attributes to an outperformance in profitability and orders at the former while the latter shrank. There is a demographic split in terms of their customers, particularly in the UK, he says, with Deliveroo trending towards a more affluent base in London and Just Eat being more regional, meaning its consumers tended to be under more financial pressure.
Woods adds Deliveroo also benefited from a stable management team and saw shares boosted by a healthy buyback thanks to cash left over on the balance sheet from the IPO.
“If you want to invest and grow but don’t have the cash internally, it’s pretty hard to raise that anywhere else”
Demise of DTC
If ditching takeaways was seen as an easy way to save money, then cutting back on boxes of wine was a no-brainer for consumers, sending shares crashing at Naked Wines and Virgin Wines UK in 2023. Naked remains in a desperate fight for survival after calling time on CEO Nick Devlin at the end of the year, following yet another profit warning and ongoing underperformance against forecasts.
“These DTC names are still suffering from over earning during the pandemic,” Woods says. “And if your budget is pressured then you’re going to cancel subscriptions pretty fast.
“The other thing hitting a lot of smaller companies is there just isn’t as much cash going around to help fund them. If you want to invest and grow but don’t have the cash internally, it’s pretty hard to raise that anywhere else.”
2023 proved to be a year to forget for usually reliable spirits stocks such as Diageo. Long-time boss Ivan Menezes died, and new CEO Debra Crew suffered an embarrassing end to the year: the group issued a shock profit warning as premiumisation finally came under pressure, with drinkers cutting back or trading down.
Alcohol under threat
Trevor Stirling of Bernstein describes it as “a torrid year” for alcohol stocks. “The spirits companies have been hit by anxiety about what will be the new normal level of growth in the US and China, with Diageo also dragged down by weak demand and over-stocking in Latin America,” he says.
“The big brewers fared slightly better, notwithstanding pressure on margins from input costs, the impact of poor summer weather in Europe and the massive hit to AB InBev from the Bud Light boycott in the US.”
Other vice stocks – and normal defensive safe havens – British American Tobacco and Imperial Brands also suffered in 2023 as they juggled strategies for adapting to a ‘smokeless world’.
Fmcg players will be hoping that the new normal is a bit more, well, normal in 2024 and the state of perpetual crisis calms down.
But as AJ Bell investment analyst Dan Coatsworth points out, the UK market is still undervaluing companies. “With no sign of a major re-rating in UK equities,” he says, ”expect to see more takeover activity in 2024 as there are still companies going cheap.”