The Grocer Top Products Survey 2017: Up!

Food price inflation is back with a bang. However you measure it. The ONS’s Consumer Price Index is at a five-year high driven by a 4.1% hike in the price of food & drink. The Grocer Price Index showed 2.5% inflation in November. The BRC-Nielsen Shop Price Index put food price inflation at 1.5% last month. And Kantar Worldpanel says inflation is running at 3.6% [12 w/e 3 December].

The Grocer’s 2017 Top Products Survey spells that out in detail: 93 of grocery’s 114 biggest sectors have seen average prices rise in the past year. The baby & infant care, dairy and booze sectors are among the biggest contributors to a 2.1% hike in average price for the £106bn of sales we’ve analysed in partnership with Nielsen.

 

Flying high: retailers’ sales growth

The simple conclusion to draw is that Brexit is delivering the increase in food prices experts warned it would. The full picture, however, is far more nuanced. The devaluation in sterling was impacting import prices back in mid-2016 yet retail prices did not immediately follow suit; in fact the market was deflationary until the start of 2017.

As opposed to the food price spike in 2008 when prices spiked significantly in response to soaring input costs, what we’ve seen since the Brexit vote, according to Nielsen head of retailer & business insight Mike Watkins, is a more progressive realignment of inflation in which the impact of sterling’s fall has been carefully managed by retailers and suppliers to minimise the impact on consumers. “We knew it was coming, so it’s been planned for and built in,” he says.

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In categories where retail price inflation has been most pronounced it has often been unrelated to currency. In butters, spreads and margarines, for instance, a Europe-wide milk fat shortage has sent butter prices soaring, resulting in the likes of Lurpak and Country Life pushing through significant price increases.

Top five fastest growing products

First, a qualification: grocery’s top five fastest growers in 2017 are in fact all tobacco products (Player’s, B&H Blue, Chesterfield, Gold Leaf and Sovereign Blue), driven by spiralling duty and smokers’ ongoing migration to cheaper smokes. To illustrate how Britain is eating, drinking and shopping differently, we’ve not included tobacco in the gallery.

 

And while inflation is clearly impacting products across the board, one of the key takeouts from this year’s Top Products Survey is that if the branded or own-label proposition is strong enough and consumer trends are blowing in the right direction, inflation need not come at the expense of volume growth. Take fresh fruit, for instance, where an inflationary market has not prevented Brits consuming an extra 80 million units in the past year, making it the largest growing non-tobacco category this year.

Free-from, where average price has also increased, has seen value and volume sales surge by nearly 20% thanks to clever marketing, a fluid pipeline of innovation and, yes, some favourable consumer trends. On the other hand, fresh meat & poultry has seen volumes fall despite a reduction in average price as the trend towards more plant-based eating and growing concern over the health and environmental impact of meat dampens consumer appetite.

Top five fastest falling products

Again, the 10 fastest falling products in this year’s report are all tobacco. Mayfair has lost an eyewatering £168.1m (16%), making it the year’s biggest loser. But that only tells one story (that smokers are either quitting the fags or trading down to cheaper smokes). The next five fastest fallers reflect what’s really going on in grocery

 

This is not to understate the fact that suppliers – and particularly those that import ingredients from overseas – are under immense pressure to find ways to mitigate the impact of surging input costs. BRC CEO Helen Dickinson captured the paradox facing food businesses when she commented on November’s inflation figures. “On the one hand global food prices continue to head upwards at the same time as the weaker pound has left retailers facing significantly higher bills for imported goods. On the other hand, the tightening squeeze on discretionary spending power is reducing the ability of retailers to pass on increased import costs.” She added that while retailers are striving to provide value to keep prices down, “the capacity to absorb further cost increases is wearing thin”.

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For the moment at least, Watkins says the Top Products Survey shows how effectively industry has been working to manage those increases. “We’ve seen the value of the shopping basket grow by around 3% in 2017, which tells us two things: it tells us shoppers are still trading up and buying good quality, higher value food and drink, and it tells us that not all of the input cost price increases coming through the supply chain have been passed on to the end consumer. That point is really important.”

While putting pressure on supply chains and on margins, “it has also helped the industry keep working hard on efficiency, on collaboration with the supply chain, and basically getting back to business as usual and ensuring there is no so-called cliff edge,” he adds.

Businesses are keeping inflation in check by using an array of tactics including premiumisation, changes in promotional mechanics and pack size re-engineering. Shrinkflation attracts the most tabloid headlines and it’s true that reducing the pack size while maintaining the price point has been a popular tactic. Frijj, Jaffa Cakes and Haribo are just a handful of the brands to have re-engineered pack sizes during the past 12 months, while a recent survey from insurance brokers Lockton showed shrinkflation is now “endemic” in food and drink, with 99% of UK manufacturers admitting they have already shrunk products or would consider doing so in the future.

Promotions

However, this is far from the only tactic being adopted. Watkins notes that promotional activity has been rethought or scaled back to encourage shoppers to keep spending, with less reliance on multibuys and more focus on EDLP. Take the pizza category, where although there has been little in the way of actual retail price inflation “there has been a notable cutback in promotional activity as a strategy for managing inflationary pressures” according to Claire Mitchell, head of category and marketing at Green Isle Frozen Pizza.

The same is true in sports nutrition, where Chay Watkins, marketing director at Sci-Mx, reports that a double-digit rise in the cost of key ingredient whey has seen retailers scale back promotional activity to offer everyday low prices to consumers. “This has had a knock-on effect on suppliers, retailers and the end consumer,” he adds.

Brands are also encouraging consumers to trade up to more premium products. “One of the key drivers of inflation is the growing global demand for fish from consumers as they switch to healthier sources of protein,” says Steve Challouma, UK marketing director for Birds Eye. “As the nation’s love of fish grows, so does their desire for more premium meal offerings. As a result, brands are needing to invest in innovation in the category, which opens up the opportunity for consumers to trade up into more premium products and fish species such as basa, which we’ve recently introduced to our range.” In laundry, suppliers are looking to mitigate the effect of inflation by trading consumers up to more premium formats like caps and gems; while for businesses such as Graze, which manufactures hundreds of SKUs using ingredients sourced from all over the world, constant innovation (Graze brings on average three new products to market a week) keeps its manufacturing capability adaptable and its cost base diversified. “This diversity puts us in a good position,” says Graze UK retail MD David Irwin.

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The other key check on inflation has been the determination of retailers not to repeat their errors of the past. Back in 2008, the supermarkets were far too ready to pass on cost increases to their customers, allowing the discounters a leg up in the market that they gratefully accepted. Almost a decade on and the big four are not inclined to make the same mistake again.

Range rationalisation

In October, Tesco chief executive Dave Lewis told investors that Tesco’s inflation was 1% below the market average in the first half of 2017/18 and said the business would continue to look for opportunities to sharpen pricing in the months ahead. Part of Tesco’s strategy has been to do more business with fewer suppliers, thus enabling it to negotiate better terms. In the year to May, 95 suppliers more than doubled their volume with Tesco and 1,200 suppliers saw growth of significantly more than 10%, according to Lewis.

Sainsbury’s has also attempted to suppress price increases, albeit using slightly different tactics. At last month’s interim results announcement, CEO Mike Coupe said a 9% fall in underlying profit was due in part to a reduction in prices to remain competitive. Sainsbury’s has undergone a rationalisation programme based on stripping out branded products from commoditised categories where the discounters perform more strongly and focusing instead on providing a price-competitive own-label proposition.

10 sharpest price rises

 

“If you looked at our toilet roll range today it is substantially rationalised from where it would have been a few years ago,” Couple told analysts. “The prices have come down and the own-label presence has increased. We need to be price-competitive and range-appropriate in those types of categories.”

Morrisons, which makes a virtue of having an integrated supply chain when it comes to managing inflation, says its ongoing ‘Price Crunch’ has resulted in ‘crunched’ prices being at their lowest level for more than a year. The Grocer Price Index showed Morrisons recorded annual inflation of just 1.1% in October, the lowest of the big four by a whole percentage point. Morrisons has also focused on improving the quality and packaging of its core own-label range, resulting in sales of own-label frozen vegetables up 12%, and muesli and granola up over 20%. Asda, meanwhile, attributed a sharpening of its price position to a second consecutive quarter of like-for-like sales growth in Q3 and has promised further investment in price under new boss Roger Burnley.

Trading disputes

Many brands have suffered big losses as a result of growing scrutiny on ranging and price. The year’s biggest casualty outside tobacco, Hardy’s, has seen £36.5m (11.6%) of its sales wiped out after brand owner Accolade Wines unsuccessfully tried to push through price increases to offset the impact of sterling’s depreciation. “Hardys has had 600,000 cases taken out of Sainsbury’s in the past year and this is all down to a trading dispute,” says one senior industry source. “They tried to push through price rises; Sainsbury’s responded by largely replacing it with own label.” It helps that it’s easier to hide inflation in own label too.

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It’s not just Hardys. The pound’s weakness and tightening supplies have made the difference between profit and loss for many cheaper booze brands, and many brands have lost space as a result of demands for higher prices. In wine, Blossom Hill lost £28.3m (15.1%). In beer, Foster’s is down £36.3m (9%), the second-greatest loss of the year, following a trading dispute between owner Heineken UK and Tesco, which more than halved the lines it stocks from the brewer last spring. Carlsberg also continues to suffer following an earlier Tesco reset.

Against this backdrop, the pressure on the discounters to maintain leadership on price has been as great as at any point in the past decade. Aldi UK & Ireland CEO Matthew Barnes admitted that inflation was the biggest challenge to his business, as demonstrated by a 17% fall in operating profits in the 2016 calendar year. However, Barnes has restated his intention for Aldi to “never, ever to be beaten on price” and plans to accelerate its focus on reducing costs.

10 sharpest price falls

 

The latest Nielsen data shows both Aldi and Lidl continue to grow their share of the grocery market by double digits, suggesting that the resurgent big four have more work still to do to halt the march of the discounters. This spells bad news for any supplier hoping for some respite from the drive to keep prices in check. One consequence of the squeeze on margins has been a downturn in the level of genuinely new product innovation coming to market. Data from Mintel shows that between January and September this year just 17% of all innovation was accounted for by ‘new products’, compared with 22% in 2016 and 32% in 2014. Instead, suppliers have focused on launching new varieties of existing products, introducing new packaging, and relaunching or reformulating existing products.

Cheese, known for being a fiercely competitive branded fixture, is an example of a category where genuine innovation has been hard to come by. “Because it’s such a competitive space it’s important to get your core portfolio working with incremental additions made to grow your brand,” says Mike Harper, marketing director of Ornua Foods, which owns the Pilgrims Choice brand. “It’s hard to make those sorts of investments in silver bullet innovation when it’s so competitive.”

Innovation

Wyke Farms MD Rich Clothier agrees. “In our category it needs to be almost a completely new change of direction, which is very difficult to do in a power category such as cheddar where there is so much space given to the main brand,” he adds.

Watkins, however, believes innovation still has the ability to power growth both for categories and individual brands, so long as it taps into a genuine consumer need. “Free-from is going to be a £1bn category by this time next year and that’s a good example of a category where every month you’ll see new innovation,” he says.

He also points to the growth achieved by challenger brands such as Fever-Tree, BrewDog and Hophouse as evidence that consumers want something different and exciting that meets their lifestyle needs. Conversely, it is noticeable that some of the brands that have suffered the most significant losses in the past 12 months are less contemporary brands such as Pringles and Princes who are constantly having to reinvent themselves to remain relevant.

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In spite of recent rationalisation, retailers say they remain focused on core product innovation, particularly within own label. Lewis reports that more than 800 new lines were launched in Tesco in the first half of the current financial year and promises more targeted innovation as the retailer enhances the capability of its Clubcard.

What’s more, Lewis believes innovation is part of what’s driving a reappraisal of the Tesco brand among its customers, noting that in the first half of the year perception of value for Tesco customers improved by 2.9 points, which Lewis describes as “a very significant step up”.

Sainsbury’s, like Tesco, is growing the balance of its own label share by introducing new products, particularly in the quality segment of its price quality framework. Coupe says that by the year end Sainsbury’s will have nearly doubled the number of ‘Best’ tier products it carries since the start of 2017.

It is also developing products in brand new categories such as chilled free-from, while other on-trend segments including dairy alternatives and ‘slow cooked’ have been the subject of significant range extensions.

Retail exclusives

In categories where own-label share is relatively low, Sainsbury’s is using owned brands rather than own brands – such as My Hair Matters in health and beauty –to grow its sales, and is also introducing more exclusive branded products both with smaller suppliers like chocolatier Godiva and much bigger suppliers such as PepsiCo, whose Off the Eaten Path snacks brand is exclusive to Sainsbury’s.

Retailers will be hoping such strategies can insulate them from future price volatility in a market whose future is extremely difficult to predict.

Those of a bearish disposition have no shortage of evidence to fuel their pessimism. A recent Rabobank report warned that British shoppers and farmers are facing a “year of anxiety”, as Brexit and the return of the La Niña weather phenomenon threaten to push up prices of key commodities like sugar, cocoa, coffee and wheat.

Rabobank states that “the current high-inflation environment in the UK makes it disproportionately exposed to any significant movement in food prices, while the uncertainty over trade deals when Britain leaves the EU exacerbates the situation further”.

Industry insiders, however, appear more confident that the worst inflation has now passed through the system. Morrisons CEO David Potts said during its September results announcement that he expects to start seeing some of the inbound inflation start to unwind by the end of the calendar year, leading to lower inflation in 2018. “We should start to see it taper down,” he promised.

Watkins, too, believes we have seen “peak inflation” both within the economy at large and within consumer packaged goods. “Looking into next year we’re looking at a stable, although low growth environment. We do see shoppers continuing to economise but not compromise. They still want good quality food and drink and they still expect good value for money.”

Businesses that deliver against these expectations will be the ones flying high in 2018.

 

The Grocer’s 2017 Top Products Survey

 

Alcohol: beer & cider

Cheers, Bud: ABI soars in lager boom

Get stuffed, hipsters! As their thirst for craft ale grows, the rest of the UK is splashing out on lager Read more

 

 

Alcohol: spirits & RTDs

Spirits surge by £150m as prices rise

Brits are glugging the hard stuff like never before Read more

 

 

Alcohol: wine

Plummeting pound hurts cheap plonk

Wine brands sour as own label surges Read more

 

 

Baby & infant

Babycare hit by big Brexit price spikes

It’s going to take more than the 0.2% dip in the birth rate [OFT] to explain this one away Read more

 

 

 

Bagged snacks

Pringles miss out on £66m snacks surge

It’s good to share. The bagged snacks category has added an extra £66.6m Read more

 

 

 

Batteries

Battery sales surge as kit goes hi-tech

Grocery battery sales have been electrified this past year thanks to the growth in specialist hi-tech electronics Read more

 

 

Biscuits

Brexit takes the biscuit as packs shrink

As the pound’s value continues to fall following the Brexit vote, packets of biscuits are shrinking Read more

 

 

 

Bread

Bread brands go posh to see off inflation

At last, some of Britain’s bakers look poised to start making some decent dough again Read more

 

 

 

Cakes

Brands turn to snacks as cake crumbles

Brits have munched their way through 10.6 million fewer packs of shop-bought cake in the past year Read more

 

 

 

Canned goods

Canned price spikes drive own label up

Once lost in deflation, canned food has had some much needed value pumped back into it Read more

 

 

Cereal

Brand prices rise as cereal slide slows

Britain is “hurtling towards a chaotic breakfast” declared shadow chancellor John McDonnell in October 2016 Read more

 

 

Chocolate

Chocolate in a jam as war on sugar hits

Shrinkflation has a lot to answer for. First thing it does: lowers volumes (they’re down 3.5%) Read more

 

 

Confectionery

Rising prices take edge off candy’s crush

Haribo became the first sweet giant to go in for a little shrinkflation Read more

 

 

Cosmetics

Cosmetics up £20m thanks to pricey NPD

L’Oréal has overtaken Max Factor as the third bestselling cosmetics brand Read more

 

 

Butter & spreads

Butter booms in spite of big price spikes

Spreads brands were presented with an open goal this year when a Europe-wide milk fat shortage sent butter prices soaring Read more

 

 

Cheese

Cheese gets squeezed as Cheddar falls

Life doesn’t get any easier for cheese brands. The whole category has experienced a contraction of space Read more

 

 

Dairy: drinks

Milk back in growth after four-year dip

The soaring price of everything from butter to babyfood and chocolate to cheese leaves little room for doubt Read more

 

 

Yoghurts

SKU count up in yoghurt as top seven fall

Given that yoghurt & potted dessert sales have dipped, it might be a surprise that SKUs stocked are multiplying Read more

 

 

Free-from

Sales of free- from close in on £1bn mark

Six years since Gwyneth Paltrow declared she was going gluten-free and dairy-free, the free-from trend has snowballed Read more

 

 

Fruit & veg

Fresh fruit in the limelight as sales surge

Brits are going bananas for fresh fruit. Sales are up by £176.4m (3.8%), the greatest gain in this report Read more

 

 

Fresh: meat, fish & poultry

Meat gets the chop as sales fall by £71m

Fresh meat has suffered grocery’s biggest loss for the second consecutive year Read more

 

 

Frozen food

Attitudes to frozen thaw as prices rise

At last, some good news! Much needed value is being driven into supermarket freezers Read more

 

 

Household

Discounters clean up in household

Own label is wiping the floor with brands in the household sector Read more

 

 

Hot Beverages

Higher prices put tea back in the black

Tea has returned to value growth for the first time in this report since 2011 Read more

 

 

 

Ice cream

Ice cream up £45m despite wet summer

A good summer has always translated into strong ice cream sales Read more

 

 

Jams and spreads

Spreads in a jam as input costs spiral

Spreads, jams and marmalades came unstuck in 2017 thanks to a combination of increasingly sugar-shy shoppers and Brexit Read more

 

 

Laundry

Persil hit by £35m loss as laundry slips

Laundry has been taken to the cleaners this past year, with the supers losing sales to online and discount channels Read more

 

 

Oils

Own-label oil beats brands as prices soar

Oils have seen another year of rampant price rises in the face of exchange rate fluctuations and supply shortages Read more

 

 

 

Over the counter

Branded OTC over a barrel as sales slip

There are chill winds blowing through OTC remedies right now Read more

 

 

Paper products

Nappy sales bottom out as loo roll rises

Paper products are defying inflation as the supers slash prices and put greater emphasis on own label Read more

 

 

Personal care: grooming

Soap slips as female skin care soars

Personal grooming is somewhat more fragrant than it was this time last year Read more

 

 

Personal care: haircare

Haircare goes au naturel to recover value

Health has had a powerful influence not only on Brits’ choice of food but also on their selection of haircare products Read more

 

 

Personal care: male grooming

Bulldog bites more off male moisturisers

Male grooming products are looking decidedly unkempt. The market’s major sectors have lost £7.8m Read more

 

 

Personal care: oral care

Brits splash out on pricier oral care lines

If toothpaste and toothbrush makers are smiling about an extra £11.4m in sales, P&G will have the widest grins Read more

 

 

Petcare

Prices rise as owners seek posh petfood

A new phrase was coined in 2017: ‘pet parents’ – those who treat their ‘fur babies’ as if they were human Read more

 

 

Ready meals

Ready meal sales soar on gourmet NPD

Convenience was king in 2017. Just look at the frozen, chilled and ambient ready meals sector’s combined growth of £117m Read more

 

 

Rice, noodles & pasta

Rice & noodle players defy low-carb fad

Ask any health blogger, and they’ll tell you carbs should be shunned Read more

 

 

Sauces: cooking 

Scratch cooks can standard jarred sauces

Pass the passata. Brits are ditching jars and returning to scratch cooking Read more

 

 

Sauces: table

Seriously good sales for Heinz in mayo boom

In the year sales of mayo overtook ketchup for the first time, there have been big changes at the edge of dinner plates Read more

 

 

Savoury pastries & meat snacks

Veggie vogue drives meat- free pie boom

Don’t listen to everything the anti-meat lobby tells you about the rise of veganism and vegetarianism Read more

 

 

Sex care

Super sexual revolution as
sales rise £5m

There’s a sexual revolution going on in the supers. Combined sales of condoms, lubes and sex devices are up £5m (6.7% ) Read more

 

Soft drinks: bottled water

Bottled water booms while squash dives

Bottled water has been one of grocery’s star performers in recent years Read more

 

Soft drinks: Carbonated & energy drinks

Coke back in growth as tax looms

The drought has ended for Britain’s (and the world’s) biggest soft drinks brand Read more

 

 

Soft drinks: juices & smoothies

Innocent hits top juice & smoothie spot

Britain’s health kick has been both a curse and a blessing for juices & smoothies Read more

 

 

Soup

Heinz grows share as soup sales go cold

Soup is going cold. Volumes are sinking in both fresh and ambient Read more

 

 

Sports nutrition

Sports food & drink vaults £100m mark

Don’t be fooled by sports nutrition’s 1.1% dip in average price Read more

 

 

Tobacco: e-cigarettes

E-cigs up in smoke: sales tumble £8m

Just a couple of years ago e-cigarettes looked like it could be the Holy Grail for grocers, particularly indies Read more

 

 

Tobacco

Player’s sails past £1bn as smokers quit

Tobacco has struggled to come to terms with the upheaval of the biggest legislative changes ever Read more

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