Brexit bites, or the price of a low pound
There was an air of inevitability when PepsiCo and Nomad Foods announced they were having to increase the price of their Walkers Crisps and Birds Eye brands in November.
The news broke just weeks after Unilever took its products off the shelves at Tesco, the UK’s biggest supermarket, in a row over pricing and all three businesses have blamed the rising cost of importing ingredients since Brexit and the resulting dip in the pound.
Other food and drink manufacturers have voiced concerns too; namely Nestlé and tea manufacturer Typhoo, where chief executive Somnath Saha said costs had gone up by between £250,000 (€291,000) and £300,000 (€349,000) a month following the fall in sterling.
There is no doubt that manufacturers have been hit in the pocket by the low pound, especially those that rely on imported ingredients, like tea. However, as recently as June it was a very different outlook.
Food prices were falling, down 0.8% in the biggest drop for more than a year and even in the immediate aftermath of Brexit, retail prices (including food) were 2% cheaper year-on-year in July.
At the time, the British Retail Consortium said there had been an "extraordinary run of deflation".
Brexit is about to change that.
Indeed, falling prices will soon be a thing of the past because in 2017, inflation returns. The Bank of England expects inflation to hit 2.7% next year, up from the current rate of 1%.
It is, of course, no surprise that prices in the UK, not just for food, will increase in line with the weak pound because of our trade deficit. The UK had an eight year high trade deficit in June 2016, which of course means the UK buys an astonishing amount more from abroad than it sells.
There was some recovery in Q3 but despite the falling pound, the deficit increased again by £1.6bn in September to £12.7bn.
So what will be the impact for shoppers? In the short term, very little, because of the fixed term contracts in place between manufacturers and retailers, which often expire at the end of January. Also, a combination of Christmas offers and competition should soften any immediate impact.
In fact, Steve Rowe, chief executive of Marks & Spencer, at the beginning of November said that despite facing a further squeeze on profits from more expensive imports, “our intention is that we won't have to pass those price rises onto the consumer in the New Year”.
Perhaps that means there will be less impact on own label products compared to some of the big brands we have already heard about? If that is right, margins will get even tighter at the food retailers.
Despite this short-term relief, it’s more a question of when (not whether) prices will increase in 2017 - because as Nestlé, Unilever, PepsiCo et al have already implied, manufacturers cannot afford to keep taking a hit on imports if the pound remains low.
It would probably be more accurate to say ’will not’ take the hit on import, but either way, the message is the same - prices are going up in 2017.