This week, there have been signs that retailers are looking to pass on rising supplier costs to consumers. From discounters in Germany to Tesco in the UK, food processors could soon be getting some relief from rising commodity costs. But, asks Dean Best, will the price hike on Hovis really mean higher food bills will become the bread and butter for consumers?
And so it seems the rising cost of food production has begun to reach the consumer.
That commodity costs – from dairy to wheat to edible oil – are rising is nothing new to those of us in the trade. Food processors have been very vocal on this issue for months, pointing to growing demand in India and China, rising biofuel production and the vagaries of global weather conditions for pushing up costs.
Where the subject moved from consensus to debate was whether retailers would react by passing these costs on to consumers. Shoppers in many markets are feeling the pinch from rising bills, house prices and interest rates and retailers have been concerned that higher prices on supermarket shelves would rein in spending further.
Just last month, Lee Scott, the chief of the world’s largest retailer, Wal-Mart, admitted its profits were under threat as consumers worldwide tightened their belts. Such a warning would have been felt in retail boardrooms across the world. In the UK, the likes of Tesco, Asda and Morrisons have spent the summer locked in a fierce battle on price. It was still up in the air whether retailers would pass on higher supplier costs to consumers.
However, food manufacturers hoped – some believed it was vital – that the costs were passed on. The good news (at least for some of them) is that there are signs that prices for certain foodstuffs are beginning to rise.
In the UK this week, the price of a loaf of Hovis bread rose by 8p at Tesco to over GBP1 (US$2.03). The price hike came as Hovis maker Premier Foods warned that wheat costs are reaching “unprecedented levels”. The company also warned that it may have to raise bread prices again if costs increases on wheat and flour continue to rise. In the US, scanner data is showing price increases across many categories.
In Germany, there have been reports that even those paragons of discounting Aldi and Plus are raising prices, while larger peer Rewe is following suit – news that is sure to dismay EU Agriculture Commissioner Mariann Fischer Boel. Last week, the EU farm chief warned European retailers to act “responsibly” when setting prices. Of course, her comments will only irk the food trade, given that EU policy on scrapping dairy export subsidies and promoting biofuel production have been contributing factors in fuelling rising food costs.
Nevertheless, it would be unwise to suggest that a rise in the price of Hovis or more expensive shopping trips for some German consumers will signal relief for a whole swathe of food processors facing rising costs. Tesco told just-food this afternoon (7 September) that it would be “wrong to suggest that the end of cheap food is nigh”. “That’s not the case at all,” a Tesco spokesperson said. “We will still keep prices as low as we possibly can. There has been [cost] pressure in some areas but some prices will remain low in-store.”
For some industry watchers, certain suppliers will find it easier to pass on costs than others. “You can’t apply this across the board,” Darren Shirley, a UK analyst at Shore Capital, told just-food last month. “For companies like Premier Foods and Associated British Food, they have decent stables of brands so they have the potential to pass the costs on. I’m more worried about private-label, own-label producers; if you’re a bog-standard ready meal producer like Northern Foods or Uniq, it won’t be easy to get price increases through.”
It’s a compelling argument. However, the Hovis story picked up a lot of column inches in the UK this week and the price rises in Germany have also been well publicised. What could hearten embattled food producers is that consumers are now well aware that food prices are historically low and are readying themselves for higher food bills. Analysts on both sides of the Atlantic have said that growing publicity over issues like biofuels is creeping into the consciousness of many consumers. Consequently, there is the expectation that food prices will start to rise. This could give retailers scope to ease some of the pressure on some of their key suppliers with price increases.
What’s more, the underlying causes of rising commodity costs seem entrenched. Population growth in India and China shows no sign of slowing, while politicians in the US and the EU seem intent on promoting biofuel as a green energy alternative. The rising price of Hovis may have been the first tangible sign of rising food prices (at least here in the UK) but it could be an accurate indicator of things to come.