Pricing pressures to nibble at UK packaged food suppliers' profits, Moody's says

Difficult trading conditions for packaged food suppliers in the UK will persist in 2016 as a result of the ongoing price war between food retailers, according to Moody’s.

However, in a note to clients on Thursday, the ratings agency said downgrades among suppliers are "not a given" as their "financial flexibility provides a degree of protection."

Moody's expects that volume growth in the fresh prepared food segment will remain resilient, with the food-to-go or ready-to-cook categories benefiting from consumers' current preference for convenience and freshness.

On the other hand, branded product manufacturers could face increased competition from private labels and find it increasingly difficult to justify their price premium as the quality gap narrows, the agency said.

The UK national living wage will have a limited impact in 2016 but the effect of further increases to 2020 will be much greater. Companies will take steps to mitigate the cost impact but a complete offsetting is unlikely, Moody’s noted further.

Eric Kang, an analyst at Moody’s, said, "While ongoing pricing pressure could start biting on food suppliers' profits and margins in 2016, as we do not anticipate commodity prices will provide the same windfall as last year, it may not have material rating implications for the companies we rate."

Headwinds could weigh most heavily on the ratings of Premier Foods (rated B2 negative), Boparan Holdings Limited (B2 stable) and Iglo Foods Finco Limited (B1 stable), the agency concluded.