Consumer price inflation in the UK has risen from virtually zero at the beginning of 2016 to 1.2% in November – its highest rate for 2 years and economic pundits are reckoning it might test the Bank of England’s target rate of 2% early in the New Year. Mind you, overall inflation would have been higher through the year if it wasn’t for price deflation for food and grocery products . This has been great news for consumers but cold comfort for food industry participants!
What’s kept food prices down in 2016?:
- ferocious competition in grocery retail – “traditional” supermarkets desperately cutting prices to stem market share losses to the hard discounters. Is the Price War all over? Not on your nelly!;
- Food manufacturers “buying forward”, so their ingredient costs in, certainly, the first half of 2016 reflected international commodity prices in 2015. The FAO food commodity price index was 20% lower in 2015 than 2014 and continued to drift lower until mid-year 2016.
So, what can we expect in 2017? In short, higher food prices but, likely, not as high as food suppliers would like. An inexorable continuation of the cost-price squeeze seems inevitable:
- International food commodity prices have strengthened – the FAO global food price index was 10% higher in November than in May and these are yet to be fed into higher ingredient prices in the UK. Dairy, vegetable oils, coffee and, particularly, sugar prices have seen the strongest growth, with cereal prices actually softening;
- Sterling has lost 15% of its value against major currencies – when new purchase contracts cut in, they’ll be at higher prices in £s and, remember, we import 35% or so of our food. Eventually, suppliers will be able to pass on to retailers some of the higher ingredient costs but the “Marmitegate” kerfuffle is indicative of the lengths retailers will go to before excepting price increases particularly for sensitive KVIs (known value items);
- Our view is that the economic uncertainties associated with Brexit won’t be helpful in 2017. Look, we’ve had a surprisingly good run since the referendum – no economic melt-down and our GDP growth has been better than our smouldering, snubbed EU partners. However, consumers are nervous – the unemployment rate is the lowest it’s been for 11 years (4.8%) but growth in wage rates is stagnant and, in real terms, wages have declined by 10% since the most recent recession. This decline is particularly felt outside London and the South East (e.g. GDP/head is 250% higher in London than in Wales and the North East of England). With inflation ticking up, consumer confidence is edging down. Now, retailers don’t set regional prices – e.g. Tesco can’t give Liverpudlians a price break on their trolley load of groceries and make it up on the Burghers of Bermondsey, apart from anyone else, The Daily Mail wouldn’t allow it! As a result, there’ll be plenty of families opting for a “Hard Discounter Diet” and the “traditional” supermarket chains will be fighting tooth and nail to ensure that not them but some other competitor takes the hit This means pressure on prices and margins that will be pushed right down the chain. Don’t be surprised to see one of the “Big Boy” retailers crumble in 2017.
- It’s looking like an economic and social policy-makers nightmare – huge debt load, running a massive deficit, a national productivity problem, increasing regional economic and social inequalities, inflation edging up so “should we increase interest rates?” but just imagine the house-owners response to higher mortgage rates and, to rub salt in to the wounds, OPEC confounds the sceptics and announces the first cut in oil supplies in 8 years (watch out for significantly higher fuel prices)!
Make no bones about it, 2017 is going to be a tough year in the UK and other countries’ grocery industries. But, it was ever thus! Grocery industry folk are made of stern stuff. Global food staples are intrinsically volatile and price instability seems to be increasing, driven by the physical (e.g. unexpected climate events) and the political (e.g. food trade disruption between Russia and the EU). So, don’t be surprised if we get an unexpected bout of one or both of these in 2017 to discombobulate business results and business planning.
Well enough of this festive cheer! A Very Happy Christmas and let’s hope a serene and profitable New Year to you all from David and Miguel.