Bottom Line: Kenwood shows how it's done

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INFLATION may appear to be on its knees for the time being, but it makes life tough for anyone supplying the high street retailers, all of which are battling to hold the line on prices.

Against the backdrop of weak consumer spending in the UK, the one-fifth expansion in sales at Kenwood, the kitchen appliances manufacturer, is impressive.

Equally impressive is the fact that Kenwood has managed to maintain its operating profit margins above 11 per cent in the face of downward pressure on prices from cost-conscious retailers.

The secret of Kenwood's sales success is relatively straightforward, textbook stuff. Turnover is rising because the company is exploring new markets for its goods - the Far East is particularly promising in this respect.

In its more mature marketplaces, like the UK, sales are helped by the introduction of new products such as water filters and coffee makers. It is also upgrading long-established product lines such as kettles and toasters.

Kenwood's strategy for dealing with price pressure from its retail customers is similarly straightforward - it is cutting costs.

Rather than cutting deeply into existing staff Kenwood is lowering its average cost base by building up manufacturing facilities in China to service its mass-market products. It is gradually reducing the use of outside, Europe- based contractors to make its more value-added products.

Kenwood, by innovating and managing its costs, is showing the way for UK manufacturers to deal with zero price inflation. But the shares, up 3p at 328p yesterday, are trading at a mere 15.5 times estimated full-year earnings per share. That is a discount to both the market and the sector. Buy.