16 Apr 2008


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Is this the true cost of food?

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food price inflation

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Frozen food to come back in fashion 16 Apr 2008

Andrew Phipps, senior client director, srcg, on how food price inflation may shape shopper and retailer behaviour

"Not just a case of your loaf of bread being a bit pricey"

You may have found your recent weekly shop costing more than it did last month, indeed more than it did last week.

At a time of higher mortgage rates, decreasing house prices and general economic turmoil the one commodity that people cannot do without, food, is in a league of its own in terms of recent price differential.

Some facts and figures: during 2007-2008 global wheat consumption outstripped production by 14.7m tonnes, leaving global wheat stocks at their lowest in 30 years.

World cereal production has declined by up to 16% in recent years and wheat prices were 83% higher than the previous year.

The IMF chief warns that “we are facing a huge problem; hundreds of thousands of people will be left starving”.

This is not just a case of your loaf of bread being a bit pricey; it's about large parts of the world facing the risk of severe food shortages – India banning non-basmati rice exports, riots in Indonesia over a lack of basic food stuffs; the middle classes in Bangladesh queuing for five hours to buy rice.

Further fuelling food inflation is the spiralling cost of oil – $113 a barrel at today's prices –resulting in increased cost of production, transportation and shipping.

The high cost of oil has meant in some instances land being given over for biofuel production; in China 3m hectares once given over to rice now produce biofuel crops, basically the whole of Belgium.

Obviously all these grain crop price increases have a knock on effect to meat and dairy production costs, mysupermarket.co.uk a reputable price comparison site, states the price of fresh chicken has increased by 77% in a year, British beef mince by 64%, eggs by 40% and milk by 17%.

All of these products are household staples; these aren't luxury goods you have as an indulgent treat, these are the essentials.

So what does this mean for the UK shopper?

Perhaps a realisation food prices have been kept artificially low by the major supermarkets' desire to be seen as price competitive.

It feels the finger has been released from the dam and we are only seeing the beginning of the deluge of increases that are bound to follow.

Retailers and shoppers have their own roles to play in ensuring the serious issues across the world are not replicated in the UK.

It's no great secret the hard discounters in the UK are starting to see some traction across their estate; Aldi and Lidl are offering good quality at a good price and people are willing to go a little out of their way to buy into that cheaper way of living.

This time last year the focus of supermarkets was how to make as much money as possible out of the premium lines in store and this contributed to the increases we saw towards the end of 2007.

It is likely that while premium ranges remain important, the growth this year may well come from the other end of the offering, the value lines.

Meeting the needs of customers by enhancing the offer is going to reap dividends for retailers, particularly in some of the 'forgotten' categories like frozen.

This year will see a big comeback for the frozen aisle as people remember the value of buying something, defrosting what you want and saving the rest – the ultimate in portion control.

The role of shoppers is to look at what they are buying and using.

The fact is that according to recent government figures food accounts for 20% of all domestic waste, food worth in excess of £8bn is thrown away, the vast majority of this still in edible condition.

If an average household spends £100 a week on food, that is the equivalent to throwing away over a £1,000 a year.

Why would anyone do that? The saving to be made in reducing food waste will offset the increased food costs we are seeing in the UK.

The next year or so is going to be tough; prices will continue to rise at a faster rate than income levels.

To retain the shopper of today retailers need to understand how their needs will change in a different market climate with differing dynamics.

The adage 'the cost of a meal can be judged by the cleanliness of a plate' holds true; retailers need to sell what customers want and shoppers have to buy what they need.

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