The ongoing cost of living crisis is significantly squeezing disposable income.
The recent Asda Income Tracker showed 40% of UK households experienced negative discretionary income last month, even before the removal of the Energy Bills Support Scheme – which means the situation could still get worse before it gets better.
Kantar showed UK food price inflation accelerated further, to 17.5% in the last four weeks. The situation is no better in Europe, with food price inflation sitting at 16% in France and 20% in Germany.
With other non-food measures of inflation starting to slow, the continuing ramp of food price inflation is becoming increasingly concerning for governments around Europe.
Unfortunately, food prices can’t be tamed by blunt policy instruments such as interest rates. The fundamental problem is that food prices depend on the vagaries of harvests and a myriad of supply and demand factors. The impact of the Russia-Ukraine war is having a long-lasting effect of distorting food supply chains, but the bigger concern is that rapid climate change will only increase volatility.
Despite higher food prices on shelves, farmers are still faced with elevated diesel and fertiliser costs and many are still loss-making, or only making marginal returns. As more farmers are lost to the industry and younger generations show less interest, this is a clear and present threat with few easy fixes.
Couple that with decades of under-investment in farming and the requirement to move to more regenerative agriculture to ease climate concerns, it is clear costs are set to rise. Decades of access to cheap food appear to be over, and consumers may have to get used to much higher food prices in the longer term.
This reality is not stopping governments trying to intervene. Some countries, such as Hungary, have tried food price caps, but that only inflates prices in other products to compensate and the upshot is even faster food inflation. Portugal plans to cut VAT on essential foods to ease the pressure on household incomes, but the impact of this measure is unclear.
In France, the government has been pushing anti-inflationary food baskets, which will impact retailers’ margins by several hundred million euros. However, when we look at the detail, it only includes a relatively limited number of SKUs and is mainly focused on private label. Carrefour and Leclerc have been vocal about pushing pricing down and driving their private label ranges.
The irony of this rhetoric is that private label pricing has been increasing at a rate close to double the level of brands. Perhaps even the most staunch food retailers may have to accept that after a decade of food price deflation, inflation is here to stay.
Given this backdrop, accusations of profiteering are rife. That’s especially when one considers the closely watched FAO Food Price Index, which has posted its 11th month of slowing inflation, even as food prices on shelf continue to move higher. There are many reasons for this difference, including hedging policies, conversion costs and currency, to name a few. Looking at commodities prices rolling over on a screen is very different to the day-to-day reality.
Tesco said recently its profit margin of 4p in the pound was “very slender” compared to other industries. Other retailers have been passing the buck on to suppliers, saying they are taking excessive pricing. The suppliers have responded by highlighting the huge profit shortfall in their margins in recent years due to pricing under-recovery. For example, Nestlé’s gross margins have dropped 400bp since 2020 and the company has pushed gross margin recovery out by 12 months.
Nestlé CEO Mark Schneider has been clear the company does not want to be a price driver, but is simply responding to inflation rather than fuelling it.
Both retailers and suppliers make good points, but the truth is the food system is broken. Until that is acknowledged, it is hard to be optimistic about the future. One thing is for sure: the blame game helps no one.
No comments yet