Street talk: Inflation means consumer must remain front-of-mind
By Rod Street | 28 September 2012
In the course of seeking to create a bold new model for forecasting domestic food prices, a team from the University of Exeter has uncovered interesting insights for the FMCG industry that point to how retail food prices in the UK and Europe are likely to change in coming years.
The team examined the factors commonly considered potential drivers of food price inflation – including world commodity prices, labour costs and the price of oil – and measured their impact on UK retail and domestic producer prices, the same indicators used by the new Consumer Price Index (CPI). Their conclusions? The most important determinant of inflation, alongside exchange rates, is the growth in world food prices.
In the last 20 years, the global price of agricultural commodities like wheat and cereal has risen dramatically – after an 18-month dip, they are now climbing once again. As they rise, so will the price of food in shops in the UK and Europe.
Since many of the factors driving high world food prices are persistent and long-term, our view at SymphonyIRI is that this upward trend will continue over the next 10 years in a reversal of the trends that have continued in the background for most of the last quarter of the twentieth century.
Demand from key emerging economies, such as China, will continue to exert a powerful impact on prices. It isn’t only the price of raw building materials that soars as the country continues to develop, but also of many food and drink products like wine and meat, as consumption grows and bumps into limits on the supply side.
On the supply side itself, volatility and sustainability remain critical factors. It’s probably safe to assume that we’ll see more of the extreme weather that has brought poor harvests and price hikes across the globe again this year. This volatility will also continue to threaten free trade in important staple foods, as countries remain cautious about domestic provision and food security.
The underlying pressure on prices presents a challenge to suppliers in the face of the continued failure of the global economy to grow as fast as expected, and the prospect of a very slow advance out of debt-laden recession. Many households are wrapped in uncertainty and facing pressure on disposable incomes that will be increasingly difficult to manage if food prices continue to rise as they have done over the last few years.
What does this mean for food suppliers? I can see four implications:
The value segment of most food categories will get bigger. We have started to see this in many categories already, and it is something our analytics has uncovered as a response to the economic trends, which are promoting greatly increased price sensitivity. As more people search for better value it is likely that the volume of lower-priced products on offer in supermarkets will expand.
This is both an opportunity and a threat: an opportunity to serve a burgeoning part of the market; a threat to the mid-market tiers in categories and to the sustainable economics of the businesses that do not adjust to this new reality. Manufacturers should ask themselves: “Can we address the value segment better?” while taking an equally strategic approach to their higher-end offers. Detailed analysis of price versus demand across categories will help manufacturers to optimise future pricing and positioning strategies.
Category volatility will increase. The search for value is prompting shoppers to seek different solutions to their food needs – not merely swapping a product for a cheaper alternative, but also favouring one category versus another. While consumers’ buying habits have always moved for lifestyle reasons – to eat more healthily or be more environmentally-friendly, for instance – price inflation will prompt additional movements as the pressure on the total cost of their shopping basket increases. Manufacturers need to think about category adjacencies as well as category choices.
The market will become more fractured. The debate about the gap between rich and poor illustrates the economic trajectory of different consumer segments. Some are and will continue struggling to make ends meet, and others will not need to worry about spend on food. The impact of this is already evident in the fortunes of discount stores like Aldi or Mercadona at one end of the market, and higher-end supermarkets like M&S and Waitrose, both of which have growth opportunities. But in a flat market this must come at the expense of the mid-range where growth will be slower, and the impact will be a retail trade with sharper propositions within and across chains. Bigger, sharper bottom-of-the-pyramid offerings targeted to the lower income household, and bigger, sharper premium price offerings. This trend will influence categories and retail channel players.
This will bring different servicing and product needs and present new sales and logistics challenges. Manufacturers need to plan their channel strategy carefully and make sure that these changes are reflected in their portfolio, and suppliers will benefit from engaging in dialogue with a wider range of channels. A business-as-usual approach will undercook the opportunity.
Brands will live or die by their value positioning. With a hollowing out in the middle, historic brand loyalties will be in danger and the normally incremental moves in price/value propositions will be challenged. Manufacturers need to get ahead of the shifts in demand to avoid locking in low margins by evaluating how sharp their brands’ value propositions are against a forward projection of price tiers, and then pruning assertively to ensure the right in category positions. This will be more critical than ever.
Price volatility and inflation is most likely here to stay for food manufacturers, and the tough times we have now been experiencing for several years will be the new norm. Manufacturers need to move from reacting to this year on year to proactively positioning themselves against it. Tough times require smart actions.
Sectors: Baby food, Bakery, Canned food, Cereal, Chilled foods, Commodities & ingredients, Condiments, dressings & sauces, Confectionery, Dairy, Dried foods, Fresh produce, Frozen, Ice cream, Meat & poultry, Natural & organic, Private label, Retail, Seafood, Snacks, World foods
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Street talk: Inflation means consumer must remain front-of-mind