Food Prices

Food price inflation: why companies are losing out

Branded companies best placed to benefit as producers hit by energy and labour costs
and retailers keep prices low

Jonathan Eley and Judith Evans JANUARY 6 2023

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The accelerating pace of food price inflation in recent months has come
as a nasty shock to British consumers, who had grown accustomed to
their weekly shop becoming cheaper relative to household incomes.

According to data from the British Retail Consortium and NielsenIQ, UK

food prices were 13.3 per cent higher in November than in the same
month a year ago. The official ONS measure is even higher, at 16 per cent
for the same month. Not since the late 1970s have prices risen at such a
rate.

Supermarkets all say their own prices are rising at a slower rate than the
headline figures, which make no allowance for shoppers trading down to
cheaper products or simply buying less.

But they also acknowledge that customers are feeling the squeeze and
looking to economise in any way they can. Several have publicly stated
that they will forgo some profit this year to keep pricing competitive.

If they are not profiting from rising prices who — if anyone — is?
If they are not profiting from rising prices who — if anyone — is?

UK food prices accelerate

Annual % change

Food*
15

10
CPIH

2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

Source: ONS • *Including non-

alcoholic beverages

Feed, fuel and fertiliser

The most significant costs across the food chain are the “three F’s” —
feed, fuel and fertiliser. Increases in the prices of these are felt first by
farmers, followed by processors and finally by retailers and their
customers.

Processors are often shielded from price increases for a while by forward
purchasing of ingredients. Charles Hall, head of research at Peel Hunt,
purchasing of ingredients. Charles Hall, head of research at Peel Hunt,
said this meant it was quite normal for price rises to take six months or
more to filter through to the consumer.

“If you take dairy, farmers started to see feed prices rise at the end of
2021. That then accelerated into 2022 with the Ukraine war but the
prices of milk didn’t really start to rise until May,” he said.

Livestock farming had been particularly affected by rising feed prices,

because it accounted for up to 70 per cent of the cost of rearing chickens
and pigs, he added.

The prices of many staple commodities have since fallen back, but some
processors will still be on contracts agreed months ago when conditions
were different.

“You’ve still got probably another six months before [raw material costs]
start to ease off,” said Hall.

At its half-year results in September, prepared meals maker Bakkavor

said it expected “significant” inflation to persist throughout 2023, having
forecast a 12-14 per cent rise in its current financial year.
 Surge in prices for UK food and drink
items
UK CPI prices, annual % change to November
Most food costs have increased by double digit
percentages in the past year. However, fruit, wine and
cigarettes price rises have not been as strong

Milk, low fat

Pasta and couscous
Flours and other cereals
Butter
Cheese and curd
Sauces*
Olive oil
Eggs
Sugar
Bread
Poultry
Beef and veal
Coffee
Rice
Fresh or chilled fruit
Chocolate
Beer
Spirits
Cigarettes
Wine
0 10 20 30 40 50

Source: ONS • *Including

condiments, salt, spices and
culinary herbs

Greenback whack
Even if global commodity prices fall, there is a complicating factor for
food producers in the UK and Europe.
food producers in the UK and Europe.

The US dollar has strengthened this year — partly because it usually does
at times of geopolitical uncertainty and partly because the Federal
Reserve has raised interest rates more rapidly than other central banks.

Forward purchasing and treasury management will have ameliorated

some of this impact. But the effects of a stronger dollar — the currency in
which almost all globally traded commodities are priced — are still likely
to be felt for the rest of 2023.

Greenhouse effect
Most areas of food processing and retailing are not especially energy-
intensive and historically the industry has not worried much about the
cost of gas and electricity because it was a relatively small component of
overall production costs.

That changed with a vengeance in 2022. Companies such as Premier

Foods, meat processor Hilton, poultry giant 2 Sisters and Associated
British Foods are often paying three times more for energy compared
with a year ago, driving food prices higher.

Hall said the prices of many winter vegetables would rise as growers that
used greenhouses passed on higher heating costs. Cucumbers and
peppers have already been affected, with prices rising and homegrown
crops declining as some farmers decided they were no longer cost-
effective.

Although wholesale gas prices have moderated from their 2022 peaks,
UK government support to help businesses cope with sharply higher
energy prices is set to become less generous from April.

Wage price spiral

One big issue for food producers and retailers predates the Ukraine crisis:
labour costs.
labour costs.

In the UK, the minimum wage — paid to most workers in the food
industry — has risen from £7.20 in 2016, to £9.50 now and will increase
by a further 9.7 per cent to £10.42 in April.

Most supermarkets are already paying more to attract staff following the
departure of older workers from the jobs market and fewer arrivals from
eastern Europe because of Brexit.
Recruitment is also a problem for labour-intensive parts of food
production, such as meat and poultry processing and fruit farming, which
had also been reliant on low-paid workers from eastern Europe.

Ministers have launched a visa scheme for seasonal farm workers,

allotting 45,000 this year. But extra administrative expenses and the
need to look as far afield as Indonesia and Nepal for workers have
ramped up costs. Agricultural labour costs rose 13 per cent in the year to
autumn 2022, according to data prepared for the National Farmers’
Union.

Rising costs have especially affected egg farmers, who have reduced their
flocks as costs outweighed the prices they receive for eggs, leading to
shortages on UK supermarket shelves. Dairy farmers, by contrast, had
benefited from steeply rising milk costs, helping their profits to recover,
said Clive Black, head of research at Shore Capital. “It really is a complex
jigsaw of winners and losers.”
UK statutory minimum wage
Hourly rate (£)

12
UK national living wage
introduced April 2016

Age threshold fell to 23

years from 25 in 2021

10

0
2012
2013
2014
2015
2016
2017
2018
20192020
2021
2022
2023

Source: Gov.uk
Brand power
Rising prices for so many things at once have left companies at all stages
of the supply chain scrambling to cut other costs and calculate how much
of the increases they can pass on without losing market share.

Large branded food groups such as Nestlé, Unilever and Mars have much
bigger margins than commoditised processors and retailers. Their brand
strength makes it easier for them to push through price increases while
their superior profitability allows them a little more leeway to absorb
rising costs.

“The global tier-one manufacturers have been much more ruthless —

because they can be, because they control their brands — in putting
through price rises,” said Black.

Most took a hit to profit margins in 2022: for example, Unilever’s

operating margin declined 2 percentage points to 15.2 per cent in the first
half from a year earlier. One group bucking that trend was Premier
Foods, maker of Mr Kipling cakes and Sharwood’s sauces, which pushed
up trading profit margin from two years earlier.

Shoppers are beginning to turn to supermarket own-brands to save

money, but profitability at the companies producing these goods is low.
“Private label manufacturers, which tend to incur inflation early and get
cost recovery late, are challenged by the present inflationary
environment,” Black said.

Food retailing is a highly consolidated industry in the UK, with the top
four traditional supermarkets — Tesco, J Sainsbury, Asda and Morrisons
— plus the two discounters Aldi and Lidl controlling more than four-fifths
of the market. But competition is intense and recent history suggests
those that do not maintain competitive pricing lose customers very
quickly.

And profits are meagre: even at market leader, Tesco, operating margin
was 3.9 per cent in the UK and Ireland in the first six months of the year
was 3.9 per cent in the UK and Ireland in the first six months of the year
and costs have escalated further since then.

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