South African Food Retail and Producers: El Niño cycles typically hurt food producers' GP margins more than retailers

In this note, we explore the relationship between food producers and retailers in the context of the El Niño effect on LFLs and GP margins. Overall, higher food inflation shows a strong correlation with LFL growth for both food producers and retailers. However, the margin effect diverges materially: the impact on food producers' GP margins is considerably more negative (-1% to -2%) versus the relative resilience seen in food retailers' margins (-0.5% to -1%). This reinforces our thesis that food producers are structurally more geared towards a benign soft commodity price environment, moderate inflation and volume growth, whereas retailers rely more heavily on inflation as a top-line driver that they can pass through without the same raw material cost exposure. However, we would caution that this cost inflation is currently compounded by higher oil prices and a weak SA consumer backdrop. As such, we view Shoprite (OW) as the structural winner in the sector, followed by Boxer (N), while