Suppliers must prepare for a possible new challenge in 2023: deflation

It’s tough to find joy in the news this festive season. Behind the consumer cost of living crunch, businesses are facing tough decisions. During a record period of insolvencies, you’d expect to see mergers and acquisitions rise as healthy businesses snap up the ailing ones. However, there were only 18 food and drink acquisitions in the July to September quarter, showing even investment appetite is low due to the uncertainty.

Food inflation is at around 15%, and we know retailers are holding notifications of 20%-plus CPIs for implementation in January 2023. There is very little joy for consumers preparing for Christmas, with predictions of a sustained recession hitting them like a one-horse open sleigh.

Once 2023 arrives, however, it could bring something very different. Speculators making predictions on what might happen is a major influence on food input prices, and that could change in a heartbeat, causing a reverse in food inflation. I see that happening in 2023, so suppliers need to be ready for a different challenge.

The root causes of our inflation are a little closer in the balance than you might think. Sure, labour costs are out of control, but situations showing improvement include: Covid disruption, post-Brexit processes, global supply chain disruption, fuel costs and even the aftermath of the mini-budget blunder.

The big one that speculators are closely observing though is Russia/Ukraine. Signs of a Russian climbdown at the negotiation table have already sparked a change in outlook. A breakthrough in Ukraine could see the prices of gas, grain and oil plummet in a matter of days. Retailers have therefore already started to push back on some of the inflation justifications for CPIs.

Suppliers, it’s time to ask yourselves if you are ready for aspects of deflation to hit. In general, suppliers soak up costs for way too long before going ahead with a CPI – then, as we know, the lag enforced on suppliers in moving their price to the retailers can run to months. There will be zero lag allowed, however, when costs go down.

Today’s stories of profiteering on petrol will be replicated in food supply in a way we have never seen before. No allowance will be given for the hole in your numbers from the lag in putting cost prices up.

Suppliers need to be clear now on their chosen strategy. Some may choose to drop price quickly to boost sales volumes, but most would prefer to hold or delay in order to future-proof or pay back into the void that CPI delays have dug into their budget.

Many suppliers will be victim to their own thoroughness, having enthusiastically provided reams of analysis based on input cost rises to justify their CPIs. The argument to reverse will be more difficult. They will learn to avoid providing detail that will be used against them later.

Delaying the timing in a drop is a justifiable way to rectify the enforced delays on the way up. What’s good for the Christmas goose is good for the gander!