The Impact

of Food Cost
Inflation

Published November 2023

 This pulse check is a product of a mutual collaboration
between Monitor Deloitte, a leading strategy
consulting firm, and Mukatafa, the only organization
working towards bridging the public and private
sector within the consumer space, and GFK, a
consulting firm which fuels the growth of thier clients
by providing a complete understanding of their
consumers’ buying behavior.

The impact of food cost inflation 2

 Marhaba,

Since the launch of Vision 2030 Under the leadership of King Salman and HRH Crown
Prince, the Kingdom of Saudi Arabia has focused on increasing the contribution of the
private sector and empowering the third sector in order to contribute to the development
and implementation of initiatives that work to achieve the pillars of the Kingdom's Vision
2030: a healthy society, a prosperous economy, and an ambitious nation.

One of the core initiatives is the mechanism for developing and implementing public
policies and enabling the private sector to be an effective partner in the process.

Mukatafa has specialized in lobbying the private and public sectors to join hands and
work together to identify high-impact legislation to increase the growth of business,
reduce the cost of doing business costs, and increase the ease of doing business in the
private sector. Hence, cooperate very effectively to develop new legislation and improve
existing ones. Finally, measure the impact on the legislative system after implementation
to assess opportunities for improvement.

One of the means used in Mukatafa is to enable decision-makers to see the constraints
facing the private sector is doing studies since they identify and analyze the legislations
that are hindering the private sector and also provide a comparison of best practices
within the Group of Twenty (G20) and the expected impact of improving legislation. The
studies contain private sector recommendations on legislation and initiatives needed to
increase the growth of business, reduce the cost of doing business costs, and increase the
ease of doing business.

Prince Waleed bin Nasir bin Farhan Al Saud

The efforts that exist today and the cooperation between

the private and public sectors in the Saudi business ecosystem
enabled us to monitor the challenges.
Mukatafa Consulting Team

The impact of food cost inflation 3

Preface 2022
Food inflation

1.37% Saudi
Arabia
While the global trend of inflation in
17.3% 13.8% 4.5%
food prices has tailed off and prices UK USA India
have stabilized in the first half of 2023, 4.8% 6.3%
food-related businesses around the world UAE Kuwait

and their customers have been forced to

contend with significantly higher costs.
The Kingdom of Saudi Arabia (KSA) has distinguished itself
among major nations by achieving a relatively modest rate
of food inflation, currently running at 1.37%, down from a
peak of 4.35% in the October 2022.1
This is well below the rates experienced in nations such as
UK (17.3%), USA (13.8%) and India (4.5%), and in neighboring Figure -1

countries including Kuwait (6.3%) and UAE (4.8%) .2

Source: Trading Economics

Concerns for Consumers in KSA

Inflation 36%
Unemployment and jobs 31%
Taxes 30%
Covid-19 22%
Climate change 20%

This relatively low rate has been the result of a Education 16%
14%
combination of factors including government-led
Moral decline

Poverty and social inequality 13%

inflation-control measures, enhanced social safety nets, Crime and violence 11%
11%
the low proportion of private label sales, and changing
Healthcare

Immigration control 9%

consumer behaviors. Maintaining social relations 9%

Threats against Env 8%
Rise of extremism 6%
Access to credit 5%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Figure - 3
Sources: IPSOS - Primary Consumer Sentiment Index (May 2023)

Nonetheless, food businesses – restaurants and retailers – have been hit hard by higher food/ingredient
costs and rising costs (labor, fuel, rent, fees etc.) in their supply chains, and many have had to pass at
least some of this onto the consumer. And, while inflation may have fallen back, there is no indication
that prices themselves, perhaps with the exception of fuel, will fall any time soon.
In fact, despite its fall and current relatively low level, inflation and its impact on purchasing pow-
er and consumption behaviors remains the number one concern for consumers in KSA.3 In response
to these concerns, Mukatafa commissioned a pulse check survey to assess the state of the market,
explore how different stakeholders have been impacted by high food prices and, critically,
capture some of the behaviors and strategies they have adopted to mitigate the pressure on their
budgets. Mukatafa partnered with Monitor Deloitte to conduct this snapshot research, which was
carried out in May and June 2023.

We present the results here not as the definitive state of play in the food sector but as an indication
of the scale of the impact and change that businesses and consumers have had thrust upon them,
and to provide other sector players with ideas to help them optimize their businesses in this altered
landscape.

1
Trading Economics. (2023). Saudi Arabia Food Inflation. Available at: https://tradingeconomics.com/saudi-arabia/food-inflation
2
Trading Economic. (2023). Food Inflation of countries: Available at: https://tradingeconomics.com/country-list/food-inflation
3
Sources: IPSOS - Primary Consumer Sentiment Index (May 2023)

The impact of food cost inflation 4

 Contents

06.
Executive summary

08.
Methodology

10.
Survey insights

13.
Case studies

22.
Conclusion

24.
Glossary

25.
Appendix

26.
Authors

The impactofof
The impact food
food cost
cost inflation
inflation 55
Executive summary
Dining out/take away
92% of respondents who have seen rising costs when dining
92%
rising
out say this has impacted their household budgets – 55% say costs
significantly so. Of those reporting a significant increase, 37%
put it at more than 10%.
Consumer behavior is changing in response to price pressure:
(respondents had the chance to choose more than one option)

47% 46% 42%

eating choosing less going to
out less expensive items less expensive
frequently on the menu restaurants

Restaurant businesses report declining footfall and smaller

‘baskets’. They also report increase in delivery versus in- declining
restaurant dining that began during COVID. footfall

Restaurant businesses report significantly higher labor,

logistics, real estate and rent, and regulatory costs.

Restaurant businesses have responded by:

Renegotiating supply Increasing their use of

contracts or switching domestically supplied
suppliers ingredients

Reformulating Changing their menus and

their recipes introducing bundle offers

Improved cost Exploring new products

control and formats

Investing in digitization, analytics and AI – including automation at the

checkout and delivery route optimization

The impact of food cost inflation 6

Grocery retail

92%
92% of respondents who have seen rising costs when
grocery shopping say this has impacted their household
budgets – 61% say significantly so. Of those reporting a rising
significant increase, 54% put it at more than 10% costs

Consumer behavior is changing in response to price pressure:

(respondents had the chance to choose more than one option)

61% 63%
are budgeting household are shopping with a different
needs prior to shopping retailer that offers better
for groceries prices and/or discounts significant
non-food
increases

40% 40%
are buying fewer branded are shopping
products and switching to less
white-label products frequently

Grocery retailers report significant non-food increases including

labor, logistics, real estate and regulation.

They have responded to cost pressure by:

Seeking ways to partner more closely Leveraging

with suppliers around, for example, promotions and
merchandising and sharing of inventory loyalty schemes

Renegotiating with suppliers Raising their prices

or switching to alternative and reducing
suppliers product sizes

Investing in digitization and Refocusing workforce

analytics in the supply chain and in strategy on core roles and
automation to reduce labor costs outsourcing non-core roles.

Launching/growing white or private labels. KSA retailers regard the Saudi

market as very brand focused, and some see limited potential for this approach.
However, 40% of consumers say they are buying fewer branded products and are
switching to white label products.

The impact of food cost inflation 7

Methodology
In developing its survey and interview topic guides, Mukatafa
and Monitor Deloitte liaised with KSA’s government-run
General Authority for Statistics (GASTAT) to identify the

46
major food ingredient and grocery items in consumers and
food businesses’ ‘shopping baskets’. They took this long list
to a panel of out-of-home dining businesses and grocery
retailers and, with their input, developed a ‘shopping list’ of
46 key ingredients from 14 product categories – those items key ingredients from 14
of greatest significance to consumers and food-businesses product categories
from a price perspective (see Appendix).

The pulse check conducted by Mukatafa and Monitor Deloitte comprised:

Consumer survey: 520 consumers in KSA were surveyed about their views and changing
behaviors around food shopping and eating out.

CFO survey: 10 CFOs of leading food and beverage businesses spanning grocery retail
and out-of-home dining were surveyed about the impact of price inflation on their
operations and the actions they have taken to mitigate any damage.

CEO interviews: deep-dive interviews with 7 CEOs of food and beverage businesses
spanning grocery retail and out-of-home dining.

Breakdown of business sample

We conducted a survey and detailed interviews with senior executives from leading grocery chains,
and restaurant and cafés businesses to gain a sense of how price rises have impacted different
types of food and beverage businesses.

Restaurants and cafés:

We surveyed the CFOs of five restaurant and café businesses and interviewed the CEOs of four of
these, including the KSA entities of two global fast-food brands, and some medium-sized domestic
restaurant and café chains. 4

Grocery retailers:
We surveyed the CFOs of five grocery retailers and wholesalers and interviewed CEOs of three of
these businesses, including two large chains and one medium-sized retailer. 5

4
Medium-sized is defined as employing between 500 and 1,000 staff
5
Large is defined as employing more than 1,000 staff

The impact 8
The impact of of food
food costcost inflation
inflation 8
Breakdown of consumer sample:
We surveyed 520 consumers on the streets of Riyadh (239), Jeddah (134), Dammam (84), Mecca (36)
and Medina (27), capturing a broadly representative sample across age, gender and income.

Age Distribution of Consumer Sample:

45%
Age 25-34

34%
Age 35-44

13%
Age 16-24 8%
Age 45-49

Ethnicity Distribution of Consumer Sample: Income Distribution of Consumer Sample:

69% 66%
Locals SAR 7,501 - 26,000
(Saudi) monthly income

16%
Expat
Arabs 24%
Less than
SAR 7,500
monthly income

15% 10%
Other
ethnicities SAR 26,001
or more monthly
income

The impact of food cost inflation 9

Survey insights
Consumers in KSA put inflation as their number one concern and it’s not hard to see why: 86% of our
sample said they had noticed an increase in food prices when eating out and 65% said they had
noticed an increase in prices when grocery shopping. The impact of these increases, however, has
not been uniform across the restaurant and grocery sectors.

86%
Noticed an increase
65%
increase in prices when
in food prices grocery shopping

Dining out vs. Grocery shopping:

92% of respondents
who have seen
rising costs when
dining out

55% say this has

significantly
impacted their
household budgets

92% of respondents who

have seen rising
costs when grocery
shopping

61% say this has

significantly
impacted their
household budgets

The impact of food cost inflation 10

Impact on restaurants and cafés

88%
78%
of respondents
eat food prepared
outside the home at
least once a week of our sample, the
typical spend on
a meal is between
SAR 100 - 150

47%
38%
doing so several
times a week

it is lower

16%
than SAR 100

eating out
on a daily
basis

92%
of respondents who have
seen an increase in food
prices when eating out
say it has impacted their
household budgets

55% 37%
say that the impact
has been significant Of those reporting a
significant increase, put it at
more than 10%

The impact of food cost inflation 11

Consumers who have seen an impact on their
household budgets caused by increased restaurant
and café-dining costs have responded by:

47% 46% 42%

eating choosing less going to less
out less expensive items expensive
frequently on the menu restaurants

Breakdown of consumer sample:

Consumers are clearly adapting their dining-away-from-home

behaviors in response to price increases. How are restaurants and
cafés experiencing these price increases? How are their businesses
affected and how are they adapting to a landscape in which their
customers are increasingly price conscious?

All of the restaurant and café businesses CFOs that we spoke to have seen price increases of more
than 10% and most have seen increases in excess of 15%. These increases have been compounded
by rising COGS 6, with many executives citing labor, logistics, rent and regulatory costs adding to
the challenges they are facing.

Most of the restaurant and café CEOs that we spoke to had responded to price increases by
exploring opportunities to switch suppliers in search of lower prices or better terms. However, in
contrast to retailers, whose offer is significantly linked to the brands they stock, restaurants and
cafés can be agile in terms of what they offer to their customers: they can change the dishes
they serve and/or modify the recipes they use to reduce their reliance on ingredients whose price
has risen. All of the restaurant and café businesses we interviewed had reformulated recipes to
use different, cheaper or smaller quantities of ingredients to reduce costs. Most had elected to
communicate directly with their customers about the price pressure, either by updating prices on
their menus or displaying posters indicating the increases. However, while pragmatic and open,
these tactics have not been entirely successful. All of the CEOs that we interviewed reported a
reduction in customer footfall and revenue per table – a finding that corresponds directly with the
insights delivered by the consumer survey.

Looking to the future, restaurant and café bosses are not overly optimistic. All of them expect to
see cost increases of 2-6%, further inflation and supply chain disruption, and most anticipate
volatility in the commodities markets, with obvious implications for their planning.

6
COGS – Cost of Goods Sold

The impact of food cost inflation 12

Case study 1:
Fast-food chain
“It’s a great time to be in KSA. There are so many growth
opportunities. Food retail is experiencing a resurgence.”
-Fast-food restaurant chain CEO
Impact/issue
Regulatory changes – particularly around
transport – high import and custom duties
and the shortage and cost of labor are all
adding to food-related cost increases.
Vast majority of items are sourced
locally but French fries and meat – key
ingredients – are both imported.
Rents have also gone up, especially in
Jeddah
Supply chain costs have risen
Dine-in has fallen since COVID with the
growth of alternative channels.
Delivery is now the fastest-growing
channel, though a large proportion of
the revenue growth is through third party
aggregators that charge ‘very high
commission’.
The impact of food cost inflation
Response
The simplest response has been to pass
the cost increase onto customers.
The impact of this has been cushioned by
customer perceptions of the brand as an
‘affordable’ option.
The business has tried to diversify and
find local suppliers. Its stringent supplier
approval requirements mean that, once
approved, new suppliers can support the
whole network, which helps them to scale.
Improved cost control, KPI measurement
and transparency.
Average check for delivery is higher than
dine in, but aggregator’s commission
charges negate this gain.
With delivery and drive-thru growing so
fast, the business has launched an app so
that customers can order upfront online
and reduce waiting.
The company is also looking to grow a
coffee shop format within its existing
estate.
13
Case study 2:
Fast-food chain
“We have not increased the prices for customers, since they have nothing to do with
supply chain. Instead, we have focused on cost reduction, not only in ingredients
contracts but in other areas such as PPE and car rentals. This has been noticed by
the customers, who have compared us to other chains that increased prices.”
-Fast-food restaurant chain CEO
Impact/issue
Price increases have been most severe in
cheese sauce, which is imported from USA,
and chicken and meat.
Price rises are a function of availability
and competition, and regulation –
requirement for SABER certificates is off-
putting for international suppliers.
COGS have risen significantly.
Business has seen a shift towards delivery
ever since beginning of COVID and
costs for this side of the operation have
increased though fuel, car rental and
labor increases.
While volumes have remained strong,
basket size has shrunk, which makes it
hard to increase prices to customer.
Labor costs have increased, and
government fees account for a large part
of this.
The impact of food cost inflation
Response
The company has significantly increased
the share of its ingredients that come from
domestic suppliers.
It has not passed on any of the supply
chain pressures to its customers in the
form of price increases and has instead
absorbed the cost and accepted reduced
margins. It has also had to absorb
increased delivery costs as its delivery
channel has grown but customers are
unwilling to pay increased charges.
The company has implemented a range
of strategies to mitigate COGS increases,
including:
• Building a new facility with greater
ffffautomation
• Menu efficiency
• Improved workforce management
• Process improvements
• Delivery route plan optimization
• Supply contracts renegotiated – longer
ffffterms for fixed prices
• Strong focus on cost reduction beyond
ffffingredients, for example PPE and car
ffffrentals.
Anecdotally, customers appear to
have recognized and appreciated price
stability in comparison to competitors.
The company has increased its use of
local labor but observes that local labor
is relatively inefficient so retaining a mix
of local and ex-patriot staff is important.
14
Case study 3:
Domestic restaurant conglomerate
with multiple brands
Impact/issue
Almost all food items have seen price
increases, except olive oil.
Chicken feed costs have tripled since 2021
impacting poultry and eggs.
Margins have been absorbed by the
majority of peers, impacting hiring, yearly
increases, and investment, and slowing
year-on-year growth.
Development and real estate costs have
also risen dramatically, especially in
Riyadh.
High last-mile delivery costs make it
cheaper for customers to visit the store
High employee turnover due to limited
career progression and competition from
government sector.
The impact of food cost inflation
Response
The company has sought alternative
suppliers in different countries due to
closure of previous markets and has
sought to combine product purchasing to
achieve efficiencies and better prices.
It now conducts monthly re-evaluation
of supply chain and menu pricing, and is
constantly choosing between absorbing
cost increases and passing them on.
However, it says that inflation is limiting
further price increases and restricting its
topline growth.
The company is exploring partnerships to
enhance supply chain capabilities.
Owing to the company’s commitment to
its unique culinary identity, changing its
menus is challenging.
The company is addressing price
discrepancies between online and in-store
experience and implementing creative
pricing strategies such as bundle offers.
The company is exploring labor-saving
solutions including AI and automated
checkout systems.
15
Case study 4:
Domestic café chain
“Prices are almost the same across suppliers, so we
haven’t considered switching suppliers.”
-Domestic cafe chain CEO
Impact/issue
Price increases at key suppliers mean that
costs for key ingredients, notably coffee
beans and milk, are very significantly
higher.
This has been compounded by
government fees – VAT and sugar tax,
which contributed around half of the cost
increase it has experienced.
The impact of food cost inflation
Response
The company has resisted pressure from
board and franchisees and has not
increased its prices in the last year.
Coffee beans are a global commodity - if
the price increases it increases everywhere
so they haven’t sought to find new
suppliers.
Instead, its strategy is to focus on
expanding its estate and entering new
markets to reach more customers.
• Growing its franchise arm with
ffffdiscounts to franchisees who open
ffffmultiple branches
• Investing in strategically placed
ffffvending machines
• Developing a read-to-drink product
• Develop products and invest in
ffffmarketing to attract new customers.
The company has also launched a
number of strategic partnerships with
large companies including airlines, airline
suppliers and other fast-food chains to
have its coffee listed.
They have invested in digitization, data
analytics and AI, including AI-enabled
customer care.
16
Impact on the grocery retail sector
As we have seen, the vast majority (92%) of those who have seen food price increases when dining
out say this has impacted their household budgets, including more than half (55%) who report that
this impact has been significant. Unsurprisingly, the figures are very similar in relation to the impact
of grocery price rises: 92% of those who have seen price increases report that this has impacted
their household budgets, and of these 61% say this impact has been significant.

Food price inflation is being felt at the till as well as the restaurant table and, again unsurprisingly,
it is those at the lower end of the income spectrum and whose grocery spend accounts for a greater
proportion of their overall income, who are most likely to feel this squeeze on their finances: 68% of
respondents earning less than SAR 7,500 report a significant impact compared with 52% of those
on higher incomes.

57% 71%
of respondents already allocated more than
respondents spend more 10% of their monthly income to groceries
than SAR 200 on groceries

54%
per week, including

27% of respondents who said prices

had impacted their household
of those who earn budget significantly said that
less than SAR 7,500 their monthly spend on groceries
has increased by more than 10%

Consumers who have seen an impact on their household budgets caused by increased
grocery prices have responded with a variety of changed behaviors, including:

63% 40%
are shopping with a different are buying fewer branded products and
retailer that offers better switching to white label products
prices and/or discounts

61% 39%
are budgeting household are shopping
needs prior to shopping less frequently
for groceries

So, the evidence from the street is that consumers are feeling the effects of increased food prices
and taking action, either by shopping less, buying white-label products or looking for deals and
lower prices. But consumer behavior is only one side of the story and to understand what is driving
their experience at the till, we have to look at what is happening on the supply side. What impacts
are grocery retailers seeing and how are they responding?

The impact of food cost inflation 17

Industry
responses:
All of the grocery retailers we spoke to have experienced food cost increases in excess of 20% over
the last three years, particularly in cheese, poultry, and rice. Like their peers in the out-of-home
dining sector, grocery retailers have also been hit hard by rising non-food cost, especially relating
to labor, rent and logistics – transport and warehousing. It is worth pointing out that, in addition to
higher fuel prices resulting from the war in Ukraine, the global rice market has been hit by poor
harvests and experts are predicting a global shortage, which may go some way to accounting for
this specific finding.

While many have sought to mitigate the price increases by negotiating with their suppliers, for
example to contract on locked-in prices, this has only gone part way to addressing the issue.
Alongside a range of strategies to manage price increases, all of the grocery retailers we spoke to
have had to raise their prices to consumers. Other strategies have included:

Finding
Renegotiating private label
with suppliers alternatives

Switching Reducing
to alternative product
suppliers sizes

And, despite reduced price inflation, most of the retailers we spoke to are anticipating further price
increases.

Echoing consumers’ changing behaviors, grocery executives report decreased footfall, decreased
basket size and, possibly reflecting the pressure on household budgets that consumers are experi-
encing an increase in customer complaints.

The dilemma for grocery retailers of all sizes is the extent to which they should pass their increased
costs onto the consumer – with the risk of further changing their behaviors as outlined above – or
absorbing them and impacting their own financial strategies.

As one might expect, different grocery retailers are addressing this question in different ways, de-
pending on their own growth strategies, market positioning and relationship with their customers
and suppliers.

The impact of food cost inflation 18

Case study 5:
Large domestic grocery retailer

“We are caught in a tough spot, with deciding whether to absorb the rising COGS
or passing them down, increased cost of logistics, as well as employees, who are
highly sought after by all F&B companies. On the customer side, the spend has been
impacted greatly by the increasing spend on entertainment and social activities.

I am hopeful that our COGS will go down with technological advancements, but it
remains yet to be seen whether suppliers pass the cost reduction to us, or choose to
increase their margins.”
-Large domestic grocery retailer

Impact/issue
Rising price of food products caused by a
variety of factors including:
• Seasonality e.g. Ramadan when eggs
are less popular
• Rising consumption of protein
• Significant increase in cost of oil
and gas, labor, regulation, especially
around labor and logistics
• Low supply of staff, resulting in a very
high demand of a very limited pool of
candidates
Response
Grow and increase sales through:
• White and private labels – however,
Saudis typically value brands and
deals
• Promotions – the company committed
significant revenue on promotions
• Renegotiating contracts with suppliers
– focusing on achieving larger ‘baskets’
at lower costs. The company has
shared a proportion of saved basket
with suppliers
• Relaunching its loyalty program,
which delivered 10,000 new subscribers

Performance improvement and cost

efficiency:
• Seeking savings on packaging
• Workforce planning
• Adapting stores to better
reflect local demand and, where
appropriate, broadened range to
offer homewares
• Exploring digital innovation in
supply chain including distributor
to store

Labor shortage leading to high churn. The company has refocused its workforce
strategy on core roles, training employees
for multiple tasks, and outsourcing non-
core roles.

Logistics – costs have risen following Streamlining with a move towards self-
regulatory changes delivery and improved analytics-driven
route planning

The impact of food cost inflation 19

Case study 6:
Large domestic grocery retailer
“Good suppliers look to sell ‘through’, bad suppliers look to sell ‘to’. We’re
looking to build relationships with suppliers that are owning the entire
process. Private label is a topic for discussion, but everyone is trying to do it.
People still love brands, especially luxury brands. Unless you have a very big
network, you can’t really do anything. Private label is needed in KSA, but it’s
still in its infancy.”
-Large domestic grocery retailer

Impact/issue Response

Transportation, duty, labor, fuel, The company is changing its business

warehousing, rent and SFDA regulation
have all increased.
With global supply concentrated in
the hands of a small number of global
corporations, individual businesses have
very little control over the prices they pay.
model to become more centralized with
smaller stores and shorter opening hours.
The company is exploring ways to partner
more closely with suppliers to reduce cost,
for example through vertical integration
and sharing of inventory.
It is also pushing responsibility for some
in-store activities such as merchandising
to suppliers.

Private/white label isn’t really a viable
option at this stage.
The company has discussed private or
white label goods and has introduced
some lines such as tissues. However,
it believes this approach has limited
potential because:
• Scale – only the very largest networks
can make it work owing to need to
the build up your own organization to
manage what was previously done by
suppliers
• High inventory cost
• KSA is currently a brand-focused
market – people love brands

The impact of food cost inflation 20

Case study 7:
Medium-sized domestic grocery retailer

“The impact of global and imported products varies depending on the categories.
Post-COVID, the impact has doubled, resulting in increased warehousing and retail
stores, mostly in Riyadh and Jeddah, with an increase of between 60% to 70%.
Our strategy is to increase the value of the product or service, which may involve
increasing prices, but not all customers may be fine with that. To maintain the
margin, we increase prices on selected items, not all.”
-Medium-sized domestic grocery retailer

Impact/issue Response

Supply chain costs have increased The company’s strategy is to increase

significantly with the highest rises in labor
– including government-imposed fees –
warehousing and rental.
Warehousing and rental costs, especially
in Riyadh and Jeddah, have risen by as
much as 60-70%.
Indirect cost increases such as
Saudization and penalties have also
impacted costs and margins.
the value of its product and service offer
– focusing on competing on speed and
variety rather than price.
Its strategy for maintaining margins is to
selectively increase prices, and to invest in
automation in areas such as picking and
packing to reduce labor costs.
The company is working on developing a
private label offer across a wide range
of products but recognizes the loyalty
customers feel for well-known brands.

Consumer behavior has shifted towards The company has introduced a range
eating out and home delivery. of ready-to-cook/eat products to make
eating at home easier.

Customers increasingly value speed and
time saving.
The company has introduced a choice of
delivery options and is making increasing
use of push notifications to send
personalized offers and recommendations
based on customer behavior.

The impact of food cost inflation 21

Conclusions
Consumers and businesses alike are feeling the pressure of food-cost inflation, and this is driving a
range of changed and changing behaviors. Consumers, unlike businesses, are not contracted to buy
their food from any one or group of shops or food outlets or to stick to the goods or dishes they have
previously chosen. With household budgets tightening, they are expressing this freedom by shop-
ping around or restraining their appetites and both grocery retailers and restaurants are having to
adapt.

Inevitably, some of the increased costs that businesses are experiencing are being passed on to the
consumer – 92% of consumers say they have seen price increases in either the restaurant or grocery
sectors. However, some of the businesses that we spoke to have decided, boldly, to absorb the price
rises and insulate their customers from supply chain pressures.

Attracting and retaining consumers is challenging at the best of times but under intense cost pres-
sure, businesses are having to find new ways to appeal to budget conscious households.
For retailers, this means an increased focus on promotions, loyalty programs and, potentially, the
launch or expansion of white or private labels. Retailers emphasize the brand-consciousness of the
Saudi consumer, but our survey suggests that, under price pressure, consumers may be willing to
adapt: 40% of those feeling the pressure on their budgets say they are buying fewer branded prod-
ucts and switching to ‘white-label’ products.

Beyond the shop floor, grocery retailers are also exploring ways to reduce costs through staff train-
ing, automation, and logistics and they are looking to the government to reduce the burden of regu-
lation – much of it new – that they say is impacting their COGS.

For restaurants and cafés, the flexibility to change menus and modify recipes goes some way to
mitigate cost increases at the till, but the same structural pressures that apply to retailers also
apply. Increased costs in regulation, labor, logistics and rent are all impacting both their in-house
operations and their supply chains, amplifying the effect of inflation, and forcing them to review the
way they operate.

The unhappy truth is that, for food businesses of all kinds, the food-cost inflation that consumers
are experiencing and reacting to is a manifestation of rising costs across all aspects of operations,
not merely the cost of food items – whether they are goods or ingredients.
Looking ahead, food businesses say they are anticipating further cost increases and slower growth,
suggesting that despite its relatively low level of inflation, the KSA food sector is likely to be suffer-
ing from indigestion for some time as it adjusts to a changed diet.

The impact of food cost inflation 22

Food price inflation impacts KSA
food businesses on a number of
fronts and reflects rising structural
costs unrelated to food items.

Costs Of
Imported
Goods
Impact On
Financial Workforce
Strategies Instability Menu
And Turnover
Adjustment
Challenges

Pricing
Challenges
Supply
Chain High Cost
Instability Of Goods Sold
(COGS)
Increased
Operating Costs
(Labor,
Rent, Fees) Customer
Relationships

The impact of food cost inflation 23

Glossary

Bundled offer
promotion grouping menu items at a discounted price, for example a
burger, fries and drink combination.

CEO
Chief Executive Officer

CFO
Chief Financial Officer

COGS
Cost of Good Sold

PP&E
Property, Plant and Equipment

Private label
grocery store’s own brand of goods

SABER
a scheme launched by the Saudi Standards, Metrology and Quality
Organization (SASO) to ensure a high level of quality and safety of
products available in KSA. Importers are now required to obtain a SABER
certificate for their products.

SFDA
Saudi Food and Drug Authority – KSA’s quality and safety standards
body for food, drugs, medical devices, cosmetics, pesticides and feed

SG&A
Selling General and Administrative expenses

White label
non-branded goods

The impact of food cost inflation 24

Appendix
Based on a long list of food and grocery items extracted from GASTAT’s data, we developed a shop-
ping basket 46 of the most price-sensitive items and ingredients used/stocked by food and beverage
businesses across 14 categories:

Bakery Bread Meat & Fresh Camel Meat

Brown Wheat Flour Raw Fresh Cattle Meat
Flour White Materials Fresh Sheep Meat
Frozen Processed Meat
Canned Food Instant Soup
Tuna

Cleaning Products Home Cleaning Detergents Others Breakfast Cereals (Corn

Flakes)
Coffee & Tea Coffee Beans French Fries
Tea Bags Honey Natural
Margarine
Condiments Black Olives Marinade
Black Pepper Nuts
Cardamom
Salt Personal Deodorants
Tomato Ketchup Care Hair Shampoos
Products Hand Soaps
Tissue Paper
Cooking & Baking Corn Oil Toothpaste
Packet Noodles
Pasta Water & Ice Water
Rice
Sugar

Dairy & Cheese Butter

Cheese
Fresh Milk
Powder Milk
Yogurt

Fish And Seafood Fresh Fish (Grouper)

Fresh Fish (Kanaad)
Fresh Peeled Shrimp

Fresh Poultry & Eggs Chicken Whole

Eggs

Fruits & Veggies All Vegetables

Banana, Apple, Orange

The impact of food cost inflation 25

Authors

Mukatafa

Hiba Amr Rajab

Policy & Research Manager

Monitor Deloitte

Karim Mukhalalaty
Partner, Monitor Deloitte

Joerg Meiser
Director, Monitor Deloitte

Debarun Das
Manager, Monitor Deloitte

Siddharth Mehta
Consultant, Monitor Deloitte

The impact of food cost inflation 26

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