With the cost-of-living crisis impacting supermarket prices, we bring you a series of articles on food inflation, looking at how this impacts consumers, growers, suppliers and retailers. Each article will deliver knowledge and research from leading industry stakeholders, to give you a data-led insight to the current volatilities facing the food supply chain.
In this article, Peter Durose, Coregeo’s Managing Director, looks at the how and why behind soaring prices, and we talk to Joe Shaw Roberts, Strategic Insights Director for Produce at Kantar, about the impact that this is having on consumer purchasing decisions.
British food security is under increasing threat. As the cost-of-living crisis deepens in the UK, British households are facing the fastest annual increase in food and drink prices since 1977. In May 2023, grocery inflation sat at 17.2%. Prices have jumped 25% in the past two years alone.
Why is this happening?
A combination of challenges across the supply chain have created the perfect storm
It’s no secret that Brexit has played its role in destabilising produce supply. In December last year, researchers at the London School of Economics’ Centre for Economic Performance (CEP) found that Brexit had added almost £6 billion to UK food bills in the two years since the UK’s formal departure from the European Union.
With 85% of food imports coming from the EU, Brexit-induced border delays, red tape and non-tariff barriers have impacted the supply chain significantly, driving consumer prices up by about 3% a year.
Brexit, and the Covid-19 pandemic, has also triggered problems with labour across the agricultural and food production industry. As the Government highlighted in its report into Labour shortages in the food and farming sector1, there have been acute labour shortages, and in August 2021, the number of vacancies were estimated to be around 500,000 out of 4.1 million roles in the sector.
Brexit barriers have meant that farmers cannot access their usual labour pool and are now paying higher prices to source workers from the UK. The report also found clear evidence that labour shortages have badly affected the food and farming industry, causing crops to go unharvested and threatening food security.
Over the past year, the government has increased the number of seasonal visas for workers in the horticulture sector from 15,000 in 2022 to 45,000 in 2023. At the recent Farm to Form summit, Rishi Sunak announced the government will do the same in 2024, with an additional 10,000 visas available if needed. The seasonal worker scheme has supported British agriculture for many years, but there have been claims that this extension is short-termist and doesn’t address the labour shortages created by Brexit in the long term.
Unpredictable weather has also affected harvests. From droughts across Europe last summer and severe floods in Italy this spring to snow and frost in Spain and Morocco, volatile weather conditions, caused by climate change, are wreaking havoc, and in some cases, leaving supermarket shelves empty of fresh produce.
Russia’s invasion of Ukraine has only aggravated the situation, shocking global commodity and disrupting supply chains. Ukraine was among the top agricultural exporters in the world, particularly for sunflower oil and cereals. Before the war, around 90%2 of Ukraine’s exports were seaborne, but the blockade of the Black Sea ports for five months by the Russian miliary brought exports to a standstill. Today, Ukraine’s exports are still suffering significantly.
The Russian invasion has also added unprecedented pressure to the European energy market. Europe’s heavy reliance on energy imports from Russia – 29% of crude oil and 43% of natural gas – has caused prices to soar to record levels.
Farm input inflation has also reached unprecedented levels, with animal feed, fuel and fertilisers (with most imports from Russia blocked) seeing the greatest increases.
The knock-on effect
The shockwaves can be felt across the supply chain.
For the farmers and growers, these soaring input costs are impacting productivity, with glasshouses deciding not to seed this season, and many farmers struggling to cover operational costs. With their input costs rising by 34% in just one year - faster than the rate of inflation - they are constantly behind curve when it comes to recovering these increases. With most suppliers locked in to fixed price contracts with retailers, they are unable to increase their own prices as their input costs rise. These forward pricing arrangements are often only corrected when contracts are renegotiated, slowing down the price change along the supply chain.
However, despite the narrative often seen in the UK media, supermarkets are not immune from these rising operational costs. Big supermarket chains, like Tesco and Asda, have major overheads. From electricity and transport to staff and rent for big premises, they have also seen their own input costs steeply increase.
For example, Tesco – the UK’s biggest supermarket – recently revealed that gross profits for 2022 have dropped by 50%, with operating profit falling by almost 7%.
As IDG highlighted in their recent Viewpoint Special, businesses at every level, from farms right the way through to supermarkets, report absorbing cost change and enduring lower profitability.
So, what does this mean for the consumer?
Consumers are feeling the pinch in every aspect of their life, from energy costs to mortage interest rates. In 2023 alone, the annual CPI inflation rate for the UK is expected to be 6.1%. But current food inflation rates tower over that figure.
As Joe explains, “prices are still rising, with grocery inflation sitting at 17.2% (for the four weeks to 14th May 2023) – the third fast rate we’ve seen since 2008. The fact that take-home grocery sales rose by 10.8% over the month in comparison with the same period last year tells you the extent to which shoppers are trading down.
“Shoppers are savvy and they’re skirting higher prices by choosing more own-label goods. These lines grew by 15.2% in May, almost double that of branded products which rose by 8.3%. The fact that Aldi and Lidl’s value sales rose by 24% and 23.2% respectively in this period also shows the extent to which shoppers are voting with their feet to cope with higher grocery bills.”
Faced with rising costs all around them, shoppers are having to change their purchasing patterns, becoming more cost-driven than ever. In fact, according to recent research3, consumers are placing affordability over health when it comes to buying food, for the first time since the pandemic.
Joe adds, “Consumers are focusing on short term priorities like reducing their basket spend, over longer-term considerations like health.”
Finding a balance
With food inflation looking set to remain in the short to medium term, we need to find ways of helping consumers to strike a balance between need, desire, and affordability.
Fresh produce is a necessity and forms a vital part of any diet. But as the purse strings tighten, many people are ‘trading down’ to own label or making less healthy choices. Own label has become very popular in recent years, as retailers have done a great job of creating good versions. However, own brand produce has its limitations, especially when it comes to communication and engagement with consumers.
The way the fresh produce category is currently communicated is very fragmented. Other categories, like ultra-processed foods are highly branded and heavily communicated. But it’s not what people should be eating to maintain a healthy lifestyle. We need to replicate this engagement with fresh produce, championing the value that brands can bring in terms of quality, taste and wider societal impact.
As a brand you are not just another commodity. You can engage directly with customers, control the narrative and educate consumers on things like taste and nutrition.
As marketers, it is our responsibility to support consumers as they navigate their choices, helping them to see that value isn’t just about cost. It’s about nutrition, sustainability, quality.
We need to encourage consumers to emotionally connect with a brand or product, demonstrating its true value so that shoppers can clearly see where they should spend their money.
Of course, price remains one of the biggest drivers for shoppers currently, but we, as fresh produce champions, can play a major role in how consumers view value in this category, in terms of taste, quality and nutritional value.