Why food prices won’t peak for a while yet

In the short term, the rollover of pricing from the food suppliers looks much exaggerated. We still don’t expect food prices to peak until Q2 2023, despite the FAO global food index having just posted its tenth consecutive monthly decline  –  down 20% since the start of the war in Ukraine.

This is explained by the lag between when inflation hits cost bases and when the food manufacturers can land pricing. Hedging also has a role to play, as many companies are still benefiting from favourable hedging covers at lower pre-war levels.

Unilever CEO Alan Jope said at the recent Davos conference that while inflation has peaked, pricing has not. This sentiment was echoed by Nestlé boss Mark Schneider, who said price increases this year would not be as steep as they were in 2022, but they still had some catching up to do.

One reason food prices still need to move higher is the bigger industry players have had to be very mindful around affordability concerns, especially in emerging markets. However, the consequence of this strategy is that more pricing needs to be landed at a time when the consumer backdrop is worsening.

Tesco CEO Ken Murphy said his company was in a constant battle with manufacturers to keep prices down. The response of the food industry was that it was facing unprecedented costs, as inflation touches all parts of its businesses.

Mondelez is one food company going for another round of pricing now in Europe. It has completed 60% of its newest pricing negotiations and will know more clearly where it stands in March.

The company is building potential volume disruption from delistings into its outlook. It sees inflation as a bigger concern than temporary disruption with some of its retail partners. We suspect the CEOs of many other food companies will be of a similar mindset.

It is not just the food companies who are saying they need more pricing: we have heard similar messages from home and personal care companies like P&G, as well as from Carlsberg recently. Carlsberg management indicated it could need double-digit pricing in Europe this year.

What might make food CEOs think again is the possibility of another round of price increases accelerating consumer downtrading to private label. While there has been some evidence of this, the percentage price increases that private label manufacturers are putting through recently is now, in some instances, higher than their branded peers.

This is because they were slower to take pricing up at the start of the inflation spike, keen instead to steal market share. Because they have lower gross margins than their branded peers, inflation actually hits their profitability more. They are now being compelled to act or face the prospect, in some cases, of losses.

We do see pricing stepping down in the second half of 2023 as lower commodity costs start to ease P&L pressures. However, we don’t see pricing turning negative overall despite demanding pricing comps.

It is not outside the realms of possibility that European pricing could turn negative at some stage, but we would be surprised if US and emerging market pricing did. Pricing in emerging markets is more sticky in part because organised retail is a small part of the grocery trade in many of these countries, with mom and pop stores – which have much less bargaining power – dominating.

The negative narrative for the sector continues to be that building volume elasticity from elevated prices leads to more consumers trading down, which then sparks irrational promotional activity. This concern is understandable. But equally, history also tells us the lag in pricing moving lower as costs roll over can be just as powerful, in a positive way, as when pricing lags inflation on the way up.

For hard-pressed consumers, none of this really matters. For them, the realisation that food prices are not likely to ease any time soon will be another hammer blow.