Food inflation set to impact in 2008

For the first time in over a decade we are seeing some underlying food inflation and this will continue to impact the food and drink industry for the rest of year and maybe beyond.

The Nielsen/BRC Shop Price Index shows food prices, when indexed against December 2005, have risen by up to 8% over the last two years.

In the first part of 2007 many cost price increases were being absorbed by the supply chain – manufacturers, distributors and retailers – but now the consumer is starting to see the impact across a wider range of categories.

The reasons for the return of food inflation are well documented and should be considered long term. They also represent a structural change to food supply.

There has been a global increase in demand for many of the basic foods consumed in the UK and by fast growing economies such as China.

At the same time, there has been a reduction in the supply of many crops and grains (cereals and dairy in particular) due to worldwide harvest failures. And, certainly in the USA, as more land is being given over to agriculture to support bio fuels.

So what does the return of food inflation mean for shoppers?

Well, at a time when we have rising food prices, shoppers are also seeing more of their disposable income being spent on household bills and fuel. And to this we can now add the so-called credit crunch where future borrowings (which, for the average household, means the cost of the mortgage) will become more expensive, or where larger borrowings are more difficult to secure.

The consumer is already becoming more cautious with over one-third of households now suggesting they will have to make savings on their grocery bills (source: Homescan Survey, October 2007).

Looking at the top 100 brands, while many will have benefited short term from the inflationary impact of rising shelf prices, which will have added value growths to the brand and category, this doesn't automatically mean volume growths are increasing by the same degree.

The demand for core grocery is predictable and broadly consumption is slowing as more of the weekly shopping basket becomes fresh or chilled food.

To put that in context, many premium foods have been growing by up to 10% a year as consumers have increased their spend when retailers' private label have been expanded, many in new categories.

Add into the mix the highest ever levels of grocery promotions at the top four multiples and it is less clear if the flattering category growths in large categories such as bakery, produce or chilled foods are sustainable, if the consumer begins to down-trade to cheaper items should household bills increase any further.

Once the new kitchen has been put on hold and the electrical appliance is made to last for another year, the next immediate saving for many households could be elements of the weekly food shop.

Last year the fmcg industry as a whole achieved 5% growths. These were 1% less than in 2006 and we can foresee a similar and progressive slowdown in sales growths for the rest of year.

So while food retailers are still looking in reasonably good shape with headline sales growths at the start of 2008 still 6% (source: Nielsen Total Till, January 2008) it's unlikely that we will see the sales growths exceeding this as the year goes on.

Source: Checkout Nielsen Top 100 Grocery Brands