Margins at risk as grocers stuggle to pass on food price inflation, SocGen warns

Following the controversy around Tesco and Unilever's stand-off last month, Morrisons last week was reported to have raised the price of a 250g jar of the black stuff by 12.5% to £2.64, driven by increased input costs.

Although competitors have not hiked their prices yet, SocGen said the "Marmite case will be interesting to follow, as it highlights the two key risk factors for the UK retailing sector in the short term, i.e. food retailers’ ability to quickly pass on higher input costs to customers", as well as the potential reaction from Asda which had actually seemed to cut its price for the yeast extract.

Analyst Arnaud Joly expects Brexit and the connected sterling weakness to result in higher input costs in the coming months and inflationary pressure in stores.

He said there was a risk that UK food retailers "may struggle to quickly pass on higher supplier tariffs to customers" due to the cut-throat competition in the sector and expected future pressure on consumer incomes.

Current share prices in Morrison and Tesco reflected their recent progress and hopes for "blue sky" margin recovery, but Joly said the road to fully rebuild profitability is "still long".

With his worst-case scenario seeing food price inflation lead to the erosion of 100 basis points of in EBIT margin, leading to a potential 30% fall in share prices, the target price for Tesco was cut to 167p from 211p, while for Morrison it was trimmed to 170p from 227p.

Both stocks had their 'sell' rating retained, with Sainsbury remaining a 'hold' with a price target of 250p.