Bernstein sees food inflation driving UK grocer earnings upside; names top picks

Bernstein expects UK food CPI to average 3-5% in 2026 and rise to 4-6% in 2027, with a peak around January-February 2027, which should support earnings for European grocery retailers. Tesco and Jeronimo Martins are the top picks, while Marks & Spencer is also viewed positively as a transformation story; Bernstein says the inflation pass-through could drive upward earnings revisions versus current 2027 like-for-like sales consensus of about 2.6-2.7%. The note also flags higher oil prices, food commodities and FX as key drivers, with Tesco, Jeronimo Martins and M&S priced at 15.4x, 13.6x and 10.9x 2026 earnings respectively.

Analysis

The market is likely underestimating the lag structure more than the inflation magnitude. If producer costs start rolling through shelves in late 2026, the cleanest earnings acceleration window for grocers is not immediate headline CPI, but the 2-3 quarters where price realization outpaces still-benign consensus volumes. That favors names with the best mix of purchasing scale, private-label penetration, and pricing power; it also creates a temporary margin tailwind for the strongest operators even if unit volumes soften modestly.

The more interesting second-order effect is dispersion. In a rising-input-cost regime, retailers with weaker balance sheets or lower procurement sophistication will be forced to choose between share loss and margin compression, while the leaders can defend EBITDA by broad-based pass-through. That argues for a relative-value long in the highest-quality grocer vs the most operationally fragile listed peers, and against the idea that inflation is uniformly “good” for the whole sector.

The contrarian risk is that consensus may already be too anchored to benign like-for-like sales assumptions rather than the actual sequencing of food CPI. If FX stabilizes or energy retraces, the earnings upgrade cycle could peak faster than the inflation cycle, making this more of a 6-12 month trade than a multi-year re-rate. The biggest reversal would be an abrupt easing in oil and sterling, because those two variables matter more than the geopolitics headline itself; once they roll over, the market will shift from pricing power to volume risk almost immediately.

Key Decisions for Investors

• Long TSCO / short SBRY for the next 6-12 months: express the view that the strongest procurement and pricing engine captures the most margin expansion when inflation passes through; target a 10-15% relative spread with a stop if UK food inflation fails to re-accelerate by Q4 2026.
• Add to JERONIMO MARTINS (JMT) on weakness over a 3-9 month horizon: the valuation gap vs UK peers still leaves room for earnings revisions if commodity/FX pressure persists; risk/reward improves if EUR remains stable vs GBP and energy stays firm.
• Buy M&S as a medium-term transformation-plus-inflation beneficiary, but only with size discipline: the setup works best if food inflation arrives before discretionary demand cracks; upside is asymmetric into the next two reporting cycles, but execution risk is higher than for pure grocers.
• Short OCADO / B&M / AXFOOD on any sector rally: these are the most vulnerable to margin squeeze or weaker pricing transmission, and the market will likely reward quality dispersion rather than the sector beta; use a 3-6 month window.
• Structure a call spread on TSCO or JMT rather than outright equity if available: the trade is about EPS revision momentum into late-2026/early-2027, so convexity is preferable to paying for long-duration equity exposure if inflation data turns before the pass-through fully lands.