Winners and losers in the great food fight

If the focus in food retail last year was saving the planet, the focus this year is in price competition. Wheat prices have risen 130% over the last 12 years, while soy prices have jumped nearly 90%. For the consumer, such price increases are hard to swallow, but the impact on the food producers is even tougher, faced as they are with rising raw material costs on one side and a more budget-conscious

consumer on the other.

Generally, the larger food companies are more diversified internationally with important emerging market exposure. Developing markets account for 40% of Unilever's (ULVR) revenues for instance and one third of Cadbury's (CBRY). Small and mid cap stocks such as meringue-maker Lees Foods (LEE) and marzipan-maker Real Good Food Company (RGD) tend to be more focused on the UK where there is less growth and this is reflected in their prices.

There's no doubt the consumer is tightening their belt. Tesco (TSCO) has upped its £1 and under product lines to win over cash-strapped shoppers, while sales of Waitrose's premium As Good As Going Out range of ready meals is up 30%, as people cut back on eating out and treat themselves at home. Trading at budget supermarket Aldi has been strong, with customers up 25% over the past year. Half its shoppers are from the ABC socio-economic groups, as the middle-classes look to trim their food bills.

But food is a business with a lot of margin to play with. Favourite food brands can rival drug manufacturers in terms of gross margins and the best enjoy relative price inelasticity because consumers will generally skimp on other items before downgrading what they eat. The business also has strong barriers to entry, with complicated sourcing chains that are hard for newcomers to break into.

Defence is sweet for Nestlé

Nestlé, listed in Zurich, remains well loved, and just about as defensive as the sector gets. Its consensus numbers have recently been upgraded on the back of high levels of organic growth, and its strength in bottled water, coffee, ice cream and baby food also secures a strong footing in the developing world. It has valuable non-food assets such as its $33 billion stake in eye-care giant Alcon and a 27% interest in L'Oréal, and a management which is good at boosting shareholder value.
 
Cadbury Schweppes could be fairly volatile short-term because it is coming up to its demerger on 1 May. The company had been losing share of the confectionary market, but reported a 7% sales increase for the first quarter, the biggest jump for a decade. It lost Easter egg market share by opting out of the usual price war - cocoa has risen 28% in the past year - but has been boosting its share of the gum market at the expense of Wrigleys.

Its US fizzy drinks business, which is being spun off, lost market share in the first quarter after four years of gains because it hiked its prices by 4% to pass on higher manufacturing and costs such as oil, corn syrup and aluminium for cans. This was double the mark-up of its two leading competitors, Coca-Cola and Pepsi.
 
Premier Foods (PFD) has a great suite of brands and is cheap but market expectations are pessimistic. Chief executive Robert Schofield has shaped the group into the UK's biggest food and drink supplier, via a series of audacious acquisitions. While the company is good at transforming the images of its strong suite of brands such as Branston and Cadburys Cakes, the issue is whether Premier has sufficient clout to extract the best deals from the multiples and whether the stable is simply getting too large to be manageable.

Calling value as key as ever

Milk and cheese manufacturer Dairy Crest (DCG) is another valuation call and is performing well, despite a £4.5 million write off from a supply contract with one of its customers as a 40% rise in raw milk costs made a contract uneconomical. Otherwise it has been successful in offsetting higher milk costs by implementing price increases across its range, and its brands have performed well with Cathedral City cheddar delivering double digit like-for-like growth.

Goodfella's pizza maker Northern Foods (NFDS), which recently snapped up the Baxter's soup plant in Grimsby, could be overvalued and Marks & Spencer's review of its suppliers is a concern as the retailer accounts for one third of Northern's sales. The company is also heavily exposed to its pension fund which is equal to 140% of its market cap.

Associated British Foods (ABF) has exposure to the high street in the shape of discount clothes retailer Primark. There are two arguments here - one that consumers will trade down and use Primark, and another that existing customers, the so-called socio-economic CD group, will be most hit. So far, while high street sales have fallen, Primark has seen trade increase by 4%. But over at New Look, for instance, Philip Green is bearish.

Cranswick (CWK) is a solid middling company beloved of analysts, with strong sales and a diversified range of products from Duchy Originals to the supply of Sainsbury's Taste the Difference range. In November, Cranswick's interim results revealed a 14% growth in turnover and profit up 13% before tax. However, it recently warned that it is in the process of passing on the cost increases of  raw materials, and the impact of the pound's fall against the euro on charcuterie products imported from Europe.

Among smaller fry, AIM-listed Zetar (ZTR), established in 2005 as a vehicle to buy Kinnerton Confectionery, has built an empire of snack food brands such as Readifoods, Humdinger Foods and Salamanda, a good long term strategy as demand for healthier snacks is predicted to continue to grow. Its most  recent acquisition Britannia Biscuits, has incurred losses of £400,000 in its start up period, in line with expectations. The company is also working on expansion into Europe.

Food as a whole is resilient - somewhere in the defensive hierarchy between tobacco, always the last to be struck off a smoker's shopping list, and beverages and everyday personal care.

However, crop disruption under current inventory conditions could make the industry susceptible to sudden shocks. Twenty years ago there was a six month stock of wheat, for example, but now there is only 27 days so any adverse weather event could change dynamics swiftly. Live cattle prices rise around six months after a hike in grain prices and have an uncanny habit of jumping in leaps of 30%.