What impact will essentials inflation have on the grocery market?
UK food sales, according to data from the British Retail Consortium, continued to rise last month. Grocery revenue increased 2.3% on a total basis and 1.8% on a like-for-like basis in the three months to end-July, the figures released today reveal.
But this masks an uncomfortable reality for food makers who are passing on increased costs to consumers in order to protect profits. “July’s food and drink value sales were again flattered by inflation, masking some ongoing dips in sales volumes,” Susan Barratt, the CEO IGD, observed.
Shoppers tighten purse strings
Food price inflation currently stands at 9.5%, numbers from the Office of National Statistics reveal. This is the highest level seen since 2008.
A survey conducted by cooking social media movement Sorted Food found that 93% of shoppers are spending more on food than they’d planned. Over half of shoppers (52%) who are spending more on their food shop are ‘annoyed’ but feel ‘there’s nothing they can do about it’, whilst a third of shoppers (35%) worry about how they will afford other items throughout the week.
“We’ve been hearing lots from our community about how worried they are about rising food prices, how they’d like to learn how to shop smarter and how stressful cooking meals on a budget can be,” reflected Sorted Foods co-founder Jamie Spafford.
IGD’s Barratt said that the summer months have seen a more upbeat mood among consumers. Nevertheless, she agrees that there is widespread concern about how to make ends meet with a more challenging outlook ahead. “Our Shopper Confidence Index improved a little in July, no doubt boosted by England’s Lionesses successful Euro 2022 football campaign. Plus, the heatwave and one in four families receiving the first cost of living payment, fewer were impacted by rising energy. However, with food price inflation forecast to increase in the coming months and Ofgem expected to announce a significant increase in the energy price cap at the end of August, there are still significant challenges ahead.”
Responding to the BRC update, ShoreCap analyst Clive Black also highlighted worries over energy prices – with reports suggesting gas bills could top £4,000 from January. But depressed consumer sentiment runs deeper than concern over the expected energy cost hikes, he stressed. The Asda Income Tracker for July showed a big contraction in discretionary spend for the majority of British households, with essential spending on food and fuel increasing due to higher prices.
The ShoreCap analyst placed blame for the current crisis on a 'disgraceful' Prime Minister, an incumbent 'enjoying himself as if Elton John on a final tour'. "It is hard not to characterise the present behaviour of Boris Johnson, in the face of material worry about inflation on behalf of the people who elected him as Prime Minister, as anything other than disgraceful."
The Bank of England, too, bears some responsibility. "A frankly incapable Bank of England set up the fire to be lit by external effects through an inability to see inflation in the system in late 2020 and into 2021," he critiqued. "And so, despite massive resource of economists enjoying their back gardens and studies, the scene was set for inflation to rip."
Robust pricing negotiations ahead
What impact will all this have on the grocery landscape? To date, large CPGs including Nestlé, Danone and Unilever have taken strong pricing action and reported pricing elasticity that has minimised impact on volumes. What isn’t clear is how long this situation can last.
“A record number of European food manufacturers are looking to raise sales prices in the months ahead. This is a clear signal to consumers that there is more in store in terms of higher prices for groceries. But the longer food companies stick to raising their prices the higher the chance becomes that consumers start to look for cheaper alternatives,” Thijs Geijer, sector economist at ING, noted.
“Shoppers are genuinely tightening their belts by buying fewer items in addition to switching stores and buying more private label products,” IGD’s Barratt concurred.
Pricing is becoming a touchpaper issue. Indeed, UK retailer Tesco recently pulled Heinz products from its shelves after it was unable to reach an agreement on price rises the manufacturer wanted to push through to consumers. The dispute, which started at the end of June and was resolved last month, saw Tesco position itself as a consumer champion ‘laser focused on keeping the cost of the weekly shop in check’.
While the companies issued a joint statement celebrating the return of Heinz branded products to Tesco shelves and announcing ‘it’s great to be back together’, the spat highlights the increasingly tense relationship between the big brands and their retail customers.
On the one hand, brands insist they need to raise prices to offset spiking input costs. Food makers are themselves grappling with higher energy costs alongside increasing commodity prices exasperated by supply-side constraints like war in Ukraine and the drought that is hitting harvests. On the other, raising prices presents a material threat to the large UK supermarkets on a couple of fronts.
Higher prices might be inflating the top line for food retailers – but consequent lower volumes and mix pressure could have a negative impact on margin, Black explained. "For the grocers, the non-discretionary nature of the bulk of their assortments plus inflation means that sales value is likely to remain positive in forthcoming months but with a danger of weakening mix [hitting gross margin] and volume [threatening supply chain negative operational gearing] there may yet be challenges to deliver present earnings expectations without bumps in the road."
The major supermarkets are also coming under market share pressure, with the German discounters Aldi and Lidl picking up shoppers seeking deeper value.
We can therefore expect more testy pricing discussions to come. Where the die fall will depend on just how bad things get – and how long the downturn lasts.
"We do not yet know the depth nor breadth of that economic car crash as we approach the impact... whilst harbouring real frustration as to a UK government that has systematically failed in energy strategy, amongst other things, and a Bank of England that has frankly been asleep at the wheel."