Inflation: some consumer stocks are more equal than others

Inflation delivered a double helping of doom for consumer industries on Tuesday. UK food delivery group Ocado and Fever-Tree, which makes tonic water, both said rising energy costs would hurt their numbers.

Inflation is hitting consumer businesses differently as it works its way through the system. Cost pressures are easing as economies slow, but patchily. Some agricultural commodities are near normal levels. Energy prices are falling, but remain historically steep.

The fatter margins of brand holders cushion them better than the slim pickings retailers characteristically receive.

Both factors put Fever-Tree in a stronger position than Ocado Retail, the delivery group’s joint venture with Marks and Spencer. The mixers specialist will meet profit expectations for the year. Ocado Retail will merely break even.

Shares in parent Ocado fell more than a tenth. It is heavily exposed to higher energy prices and the soaring cost of dry ice used to transport frozen goods.

Together they may add as much as £45mn to group costs this year, wiping out the bulk of earnings from a top line of some £2bn. Sales are expected to fall for the first time this year as consumers trade down and reduce the size of their shopping baskets from pandemic-era levels.

Rising gas prices hurt Fever-Tree by increasing the costs of glass bottles. It said gross margins were 6.7 percentage points lower in the first half of the year. But it is managing to offset this with lower transatlantic freight costs as US capacity ramps up. A scarcity of workers is the biggest hurdle to that endeavour.

Both groups are still growing. Analysts expect sales at Fever-Tree to end the year 15 per cent higher. Customer numbers grew 23 per cent to almost 1mn at Ocado. Capacity additions will add 200,000 of weekly orders to a total of 374,000 in the third quarter.

Unfortunately, inflation and higher interest rates are lowering the value of future earnings. Shares in both businesses have lost at least half their value over the past year. Fever-Tree’s earnings multiple is at 20 times compared with a long-term average of 35.

Consumer groups have little choice but huddle in the corner and take the beating markets are dishing out. Tough economic conditions and weak stock markets will persist for months to come.