The Bank of England’s Governor Andrew Bailey has warned of ‘apocalyptic’ food prices for the world’s poor, and told MPs in the House of Lords that the UK is in a ‘bad situation’.
It’s an inescapable fact that the cost of living and doing business in the UK is rapidly increasing. The food industry has been on the sharp end of this as much as any other sector of the UK economy.
The Guardian recently published an article which stated UK food prices are increasing at their fastest rate in 8 years. Ronald Kerrs, the leader of the Two Sisters’ Food Group has told the BBC he believes food costs could rise by up to 15% and nationalworld.com have already published numbers above this, with lamb for example up 16.9% on 2021.
A major concern amongst many food manufacturers, grocers and consumers is that this is just getting started, and the process cannot be stopped. There is no doubt on the domestic front there are going to be some tough choices ahead for households, many of which live paycheque to paycheque. For some people in the UK it will be the first time they have experienced heavy inflation and the media has made quite a storm around the ‘heat or eat’ dilemma people are facing. On an international level the impact of this situation in the second and third world could be catastrophic with some countries on the brink of civil strife. Not a pretty picture, and unfortunately it appears there is nothing anybody can do to reverse the trend….
Why has this happened?
There is no doubt that two years after the fact, the impact of Covid-19 lives on, freight costs are still much higher than pre-pandemic levels and in spite of its’ steady recovery, air traffic is still lower than what was considered ‘the norm’ prior to 2020. The net effect of this supply chain disruption still bites and we continue to experience sparse shelves in some of the UK’s leading grocers. Bill Showalter, former CEO of Young’s Seafood and current CFO of Flamingo Group International which is one of the worlds’ leading grower and supplier of fresh flowers took the time to talk with us. He explained that the shipping delays and supply chain disruption led to increased freight bills; at its’ peak increasing from $1.5 per kilo to $5 in order to bring products over from Africa. Andrew Simpson, owner and MD of the food manufacturer Rakusens’ gave a similar overview. Andrew provided the example that in the wake of these challenges the cost of his inner packaging had gone from approximately 3p per carton to 10p.
Brexit further compounded this challenge. The UK is part of a very complex import and export system which has been flooded with friction overt the last 12 months. We import more than we export. We are reliant on a constant flow of products entering in to the UK supply chain, and pictures of queuing lorries at the border with fresh produce going rotten have made for tough reading. Compounding this, Brexit has led to large numbers of overseas labour leaving our shores, significantly hampering the efforts of UK manufacturers that seek to increase domestic production and become less reliant on imported goods.
Labour shortages have further increased costs for food manufacturers. Across the board we have seen rapid wage inflation. The cost of staff attraction and retention is building quickly. There are many examples of this; from Finance Directors in the food industry commanding 25% pay rises to switch companies, to HGV drivers who are now being paid a minimum of £70k per annum. As of April, UK companies are also having to cost in the rise in National Insurance by 1.5%.
It has been widely reported that the Russian invasion of Ukraine has had a dramatic impact on global food supplies. Ukraine produces 21% of the worlds’ sunflower oil, 14% of its’ wheat and 10% of its’ barley. Supplies of these products to the UK has been significantly hampered, disrupting an integral part of our food production. Even if the war ended tomorrow, the rebuilding of both the harvesting process and subsequent supply chain will take many years. It isn’t just Ukrainian produce that we are struggling to source though. Russia is also a key producer of sunflower oil, wheat and barley and has been restricting their export in a response to Western sanctions.
Furthermore, the UK is also heavily reliant on imported energy and fuel, including calcium nitrate from Russia. Manufacturing companies are not benefitting from price caps on energy prices and have seen increases of up to 500% in the last 12 months. This is another challenge which will not be quickly overcome. Fully migrating to alternate energy sources and becoming a self-sufficient region will take decades.
Lastly, there has been ‘quantitative easing’. Money has become far too cheap, and more has been printed in the last two years than had previously ever been in circulation. Whilst this was to provide support to those people and businesses that needed it during the pandemic, the fact remains that government’s cannot increase the amount of currency in circulation at those levels without heavy inflation following. We are now seeing inflation at its’ highest recorded levels since the 1970s.
Impact on the UK food industry and grocers
Up and down the country tussles are taking place between exasperated food manufacturers and grocers. Systemic cost pressures means that manufacturers need to increase their prices, if they don’t many will go out of business. Grocers want to protect the consumer, especially on essential food items. Although, some have accused them of looking to protect their margins, especially after Tesco reported an operating profit of £2.6bn in Q1 of 2022, up by 34.9% on 2021. Whether the grocers are looking to insulate the consumer, or protect their share price, one thing is clear; what has always been a traditional sparring ground between FMCG manufacturers and grocers is now becoming highly adversarial and would appear to be unsustainable.
The grocers are playing hard ball on anything deemed an essential item, they are however having to make concessions for the bigger fish in the FMCG space. Pepsi, Coke, and Cadbury’s appear to be winning this battle. Tesco for example suffered a public defeat to Colgate recently after the toothpaste manufacturer refused to have their products stocked in their supermarkets unless they agreed to necessary price increases. Smaller to medium sized manufacturers are having less success, especially if they fall in to the category of non-essential. The impact of this is unknown but as more and more suppliers stand and fall on the strength of their relationships and brand, customers in the UK are inevitably going to have less and less choice.
The general consensus appears to be that there are no easy solutions to this bleak outlook. We cannot print more money as a way out of this. And rapid interest rate hikes could see us spiral in to recession, not to mention the devasting affect it would have on the public purse when the UK is already paying £86bn per annum in interest on its’ current national debt.
So are there any solutions? Maybe a few…
Walkers Crisps have changed the recipe in their products, using rape seed oil now instead of sunflower oil. An expensive and tricky change, but in the medium to long term could prove a shrewd move. Cadbury’s have been a little less sophisticated and simply reduced their family sized chocolate bars by 10% fuelling the use of the term ‘shrinkflation’. Then there are the thousands upon thousands of tussles that are currently taking place up and down the country between FMCG manufacturers and the grocers.
Bill Showalter of Flamingo Group International has confirmed they aspire to operate on an open book policy and are migrating to this model. Andrew Simpson of Rakusens’ stated ‘we are 100% transparent & show justification for how our costs have changed. This is the basis for our cost increase’. Transparency seems to be the only way to effectively communicate the challenges they face to their customers. Akhtar Zahid, Group Managing Director of Ramsden International, the UK’s leading wholesale exporter of British grocery’s took the time to speak with us as well. Akhtar confirmed that in dealing with suppliers, being able to understand their cost pressures has helped hugely with negotiations.
It does seem inevitable that the grocers will see their margins squeezed, but ultimately consumers are also just going to have to play their part. It’s a painful reality that we will have to accept prices increases are inevitable, and they are here to stay. However, we can also change our shopping habits. Consumers will reduce discretionary spend of luxury items and in some cases will have to buy less premium brands. They can and will look to cheaper destinations to do their shopping. In 2000 ALDI and Lidl represented about 1% of the UK Grocer market. In 2022 they represent 15%, and in the next 2 years it is looking like ALDI is going to surpass Morrisons as the 4th biggest supermarket in the UK.
During our interview with Michael Easterbrook, former CEO of Princes Foods and current NED of multiple businesses in the FMCG Industry, he was kind enough to highlight the latest grocery market share data as produced by Kantar for the end of Q1 2022. Tesco remain the market leader with 27.4% market share. Sainsbury’s and ASDA have 15.1% and 14.5% respectively, Morrisons has 9.5% and just behind it is ALDI with 8.6%, Lidl is next with 6.4%. Michael also pointed out the encouraging news that in spite of being a German group, ALDI are also one of the largest advocates of stocking and selling products from UK based suppliers, than any other UK retailer!
There is no doubt about it, inflation hurts, especially when it is this high. Rising food costs at this level put families around the country under unbelievable pressure. It’s already tough, and it’s going to get tougher. Hopefully households can plan accordingly and take the necessary steps to ensure they provide for themselves. Buckle up… it’s going to be a bumpy ride.