The Brexit vote and the fallout therein has made for a miserable day for U.K. stocks. But among consumer companies, the news isn't all bad.
Food and household goods products are traditionally defensive, reflecting consumers' durable need to eat, drink, smoke, wash their clothes and clean their homes. They have certainly lived up to their reputation in the post-Brexit rout. Diageo's Scotch whisky production could help it benefit, since the weaker pound could help drive sales abroad while costs fall. And tobacco stocks, which have had a fantastic run, are performing well yet again. Proving the point that, as Oasis once (sort of) put it, all you need is cigarettes and alcohol.
In the days before the vote, a bevy of U.K. business leaders signed an open letter to The Times, pledging their support for Britain to remain in the E.U. The names of the heads of supermarkets Tesco, Sainsbury and Morrison were conspicuously absent. One reason may have been that Brexit could be good for grocers -- the food-price inflation that flows from a weaker pound boosts the same-store sales figures that are a key metric for judging momentum and prospects. There are two risks here. The first is the vulnerability to consumer confidence that also affects clothing retailers. The second is that price-conscious shoppers may fall still further into the arms of Aldi and Lidl, the German discount supermarkets.
The slump in the value of the pound means higher costs for retailers that buy the goods they sell from suppliers in Asia. Factories are usually paid in dollars, so a weaker pound raises costs. But there's a dilemma brewing. With the prospect of a hit to demand, retailers may struggle to put through the price increases they need, squeezing their margins. Some are already offering big discounts to lure shoppers.
Department-store chain Debenhams noted earlier this week that for clothing retailers across Britain sales were already falling. With a vote to leave, there's no chance now of that bouncing back.
The climate of higher sourcing costs and discounting is bearable for big publicly traded retailers, but for some weaker chains, it could prove fatal.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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