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Belt tightening is hitting the food industry sparking a pair of profit warnings as producers struggle to pass on cost increases to consumers. Both sausage maker Cranswick (CWK) and dairy producer Robert Wiseman (RWD) say raw material price hikes are squeezing profit margins, with Cranswick hit by higher meat prices and the strengthening euro, and Wiseman suffering under higher diesel and plastic costs.

The problems of suppliers have been aggravated by the decision of Tesco (TSCO), which had a disappointing Christmas, not to consider any price increases until after the start of its financial year next month. Even then Tesco is likely to maintain the pressure on manufacturers’ margins as it seeks to regain its own momentum.

In addition Marks & Spencer (MKS) is seeking to consolidate its supply base and says it is ‘inviting’ suppliers to share the consequential cost savings with it. However, such irresistible requests usually result in suppliers’ margins suffering and the attitude of these two retailers will probably be mirrored by their competitors.

The severity of the warnings came as something of a shock to the City and there are now fears that further profit warnings are set to follow. Shares in Cranswick plummeted by 26% in a matter of days to 570p while Robert Wiseman dipped almost 7% to 495.25p.

Shares says: Investors should be underweight in the sector. Avoid Cranswick whose shares are likely to continue to underperform. AVOID

by: John Marshall