Food retailers, suppliers and your Christmas dinner. For what we are about to receive…

October 31, 2017


 The Christmas trading period is always key for supermarkets and their suppliers.

This year, that “golden” sales quarter will be in even sharper focus, driven by the twin market pressures of fast changing consumer habits and food cost inflation.

Supermarkets are adapting to their customers who are shopping for less, more often, being tempted by the food discounters offer and doing more ordering online. In terms of their cost base, supermarkets are responding to the national living wage, and constantly looking at ways to make further efficiencies in their supply chain. This includes further consolidation of the number of their suppliers to gain scale advantages. These changes have implications for suppliers in terms of product ranges, distribution and delivery models, and most importantly retaining and maintaining a sustainable customer base.

A new cost pressure for Christmas 2017
These trends have been going on for some time and will continue to evolve for both supermarkets and their suppliers. However, this year the food chain has to absorb an additional pressure – cost inflation. On average, food commodity prices have risen in 2017 for a number of external factors, including global economic growth. However, the UK has suffered a double whammy as there has simultaneously been a significant devaluation of sterling against both the Euro and the US dollar, 13% and 11% respectively since Brexit. The US dollar denominates the majority of global commodities and, as we import around 40% of our food of which 80% comes from the EU, the Euro exchange has a direct impact on the cost of our food. 

When will cost increases hit the supermarket shelves?
This food cost inflation has yet to fully come through to prices on the shelves – the recent inflation figures for the UK were 3%, with food a main contributor. But that still doesn’t fully reflect the costs rises, so we expect food prices to continue to rise during the final quarter of 2017. One of the reasons for this is the time lag, as costs rise in terms of feeding through the food chain from importers to suppliers to supermarkets themselves. However, this dates back to Brexit, a full 16 months ago, so it is surprising the lag has been quite so long. One reason may be that supermarkets, in response to the competitive environment they face, are holding down prices in an effort to retain footfall.

Consequently, the imported cost inflation since Brexit is currently being absorbed in the food chain between the EU producers, the importers, the UK suppliers and the supermarkets. There is only so much anyone can do to squeeze the pips in other cost savings to counter these increases and maintain profitability, and shelf prices may need to increase before Christmas. Otherwise, financial results for all the players from that important Christmas trading period could be impacted.

What will Boxing Day – and beyond – bring?
There has already been a number of strategic deals announced during 2017 in response to the first “structural” market pressure. For example the continuing interest in both wholesale and convenience businesses changing hands. Will the added pressure of cost inflation fuel additional deal activity? Perhaps partly through seeking more efficiency and further supplier consolidation, and partly from the winners and losers of this challenging Christmas 2017 trading period?

Stephen Oldfield | Agrifood Leader, PwC UK
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