What’s behind 2017’s turnaround in food prices?

Thursday, 30 November 2017

In the midst of the recession that followed the 2008 banking crisis, many shoppers welcomed the disrupting influence of Hard Discounter supermarkets. The price-cutting response of established big retailers was also well-received, fierce competition for market share led to a period of declining grocery prices stretching back to September 2014, according to Kantar Worldpanel. But in January this year, prices began to grow and like-for-like grocery price inflation now stands at 3.2 per cent (Kantar Worldpanel, 12 w/e 5 November 2017).

This article looks at some of the inflation drivers and what it might mean to those in the food supply chain. Image showing 3.2% grocery price inflation causes an increase in annual spend of £144 for average family

Exchange rate

In June 2016 the UK voted to leave the EU and sterling crashed. Compared to pre-referendum levels, in November 2017, the UK pound has fallen by 11 per cent against the US dollar and is 14 per cent worse-off compared to the euro, hitting 30-year lows along the way. This is a serious matter for the food industry because, according to Defra, around 46 per cent of food eaten in the UK is imported, with 27 per cent coming from the EU.

The horticulture sector is the biggest source of UK food imports and the industry is increasingly exposed to changes in currency value - in 2015 there was a trade gap of £7.8 billion. The presence of fruit and vegetables in the majority of shopping baskets means that retailers have absorbed rising costs as much as possible but recently prices have risen in line with, or faster than, inflation. This is also true for sugar, where 40 per cent is imported and prices have increased by 10 per cent compared to a year ago. Coffee is another case of a store cupboard staple that is largely imported and has seen prices increase (+7.6%). The UK meat market is more dependent on imported pork than it is for beef and lamb, this too is reflected in the price change.

Chart showing butter has dramatically increased in price in the last year, by 33%

Market changes

Rising prices are not solely due to currency changes. AHDB Consumer Insight articles show that there is a new emphasis on creating a premium product and image, with a higher price, in the fast-growing frozen food category. AHDB also describe how the dairy sector has been hit by falling production, a shortage of fats and rising demand connected to changing consumer attitudes.

Three major regulatory changes that may have contributed to rising retail prices:

Current government policy is for the national living wage to reach 60 per cent of median earnings by 2020. It stands at £7.50 per hour at this time, livingwage.org predicts an increase to £9.00 per hour in three years.
Employers are now required to contribute to an apprenticeship levy if their total payroll is worth more than £3 million. In retail labour costs are typically around 15% of sales value, so this may be a significant additional cost.
The latest business rate review came into effect in April. Rateable value is based on underlying property prices, which means rises for businesses in certain areas.

Summary

While the falling pound has contributed to increasing food prices, there are other factors that have influenced food price inflation, all of them placing more pressure on the food supply chain to keep costs low.

The EU is the UK’s main trading partner for food and the consequences of leaving reach further than a short-term sterling decline. If the future brings a shortage of EU labour and increased dependency on UK workers, this may result in wage inflation and the entire food supply chain is heavily dependent on migrant labour.

Despite this there are opportunities in local sourcing. Among British consumers there is a strong willingness to buy British food and drink, YouGov research shows that 73 per cent will try to do so if it is available and 23 per cent say they are more likely to buy British following the decision to leave the European Union.

AHDB is committed to helping the wider food supply chain through Brexit, making it fit for the future. Information on publications can be found here.

Topics:

Consumer insight Economics

Sectors:

Beef & Lamb Cereals & Oilseeds Dairy Horticulture Pork Potatoes

Tags:

inflation economy grocery spend food prices grocery retail market exchange rate news news release press article CRIarticle