The real cost to business of food inflation

Tue 11 Apr 2023
Posted by: Richard Cree, Phillip Adnett
Features
Man reacting to food inflation in supermarket

 

To anyone who has visited a UK supermarket in recent months, the news that food inflation hit a 45-year high in February will not come as much of a surprise. The evidence is there in the aisles and at the tills.

And those familiar with basic economic theory will have guessed that empty shelves – a sign of demand seriously outstripping supply – would also mean further price increases.

According to the British Retail Consortium (BRC), the figures released last month show that, while some analysts had predicted that prices would peak in January, February saw food inflation hit record highs. This was driven above all by the high price of sugar and increased manufacturing costs.

Helen Dickinson, chief executive of the BRC, predicted records will get broken again in coming months:

“Shop price inflation has yet to peak. As Easter approaches, the rising cost of sugar coupled with high manufacturing costs left some customers with a sour taste, as price rises for chocolate, sweets and fizzy drinks increased in March. Fruit and vegetable prices also rose as poor harvests in Europe and North Africa worsened availability, and imports became more expensive due to the weakening pound.”

Overall, food inflation accelerated to 15.0% in March, up from 14.5% in February. Fresh food inflation accelerated to 17.0% in March, up from 16.3% in February, while ambient food inflation nudged up to 12.4%, from 12.2% in February.  All three rates are above the three-month average and set new records for the category.

Dickinson says that these food price rises will eventually ease over coming months, particularly as the UK enters its growing season, but she says that wider inflation is expected to remain high.

“Retailers continue to work hard to keep prices, particularly of essentials, as low as possible. They are expanding value ranges and offering discounts for vulnerable groups. But the government also has to minimise oncoming regulatory burdens, as these will serve as a drag on investment and will ultimately contribute to higher prices for UK consumers.”

The FT reports that market analysts Kantar, which collates data from leading supermarkets, calculates inflation will represent an average extra annual cost to consumers of £837.

But there are also potentials for food manufacturers. At the recent International Food & Drink Event in London, the IOE&IT Daily Update spoke to three food businesses to understand the situation.

Lars Fay, Insula Denmark

Lars Fay is export director of Insula Denmark, which produces Amanda Roe, a tinned fish product, manufactured in Denmark and exported to the UK and around the world. It has been a staple of the UK’s fish and chip shop industry since the early 1960s. Fay says, on top of the increased complexity of importing post-Brexit, the business has also had to deal with spiralling costs.

“We have seen huge increases in raw material prices. Transportation costs are up, as are production costs. It is quite an energy-intensive product to manufacture. Raw material prices have been insane for the last couple of years.

“Of course, for the UK fish and chip industry in the UK they are not getting any fish in from Russia at the moment, so that’s putting a lot of pressure on prices as well. They were getting maybe a third of their fish from Russia before, and now they have to find that fish from Norway or Iceland. That is putting more pressure on prices.”

But Fay explains that the situation in Ukraine is affecting Amanda Roe’s costs in more ways than just the price of fish.

“There are other ingredients we use, like rapeseed oil and sunflower oil. I think Ukraine was the world’s second or third biggest provider of sunflower oil. Since the war, demand has stayed at the same level but the product is much less accessible. Everyone is turning to other sources.

“Can production is another area of added cost, because a lot of steel cans come from that part of the world.”

While the end consumer may not be aware of these challenges, Fay says that he and his colleagues are dealing with them every day and he doesn’t see an immediate end to the supply side pressures.

Lucy Cooke, Brusco

Lucy Cooke is a customer account manager at Brusco, a bulk importer of food ingredients from around the world. The company imports a large range of goods to the UK in shipping containers, then stores them in warehouses in the UK and Ireland.

It specializes in supplying ingredients such as herbs and spices, processed tomatoes and dehydrated onion powder and garlic powders for manufacturers of ready meals, sauces and dressings.

Cooke says that they saw this inflation working through the system a long time ago.

“We saw this in April last year with the war in Ukraine. That’s when we first started seeing prices go up for things like rapeseed oil and obviously you couldn’t get sunflower oil anymore, or very little of it, as a lot of it came from Ukraine. So, people switched to rapeseed oil, which meant we saw the price triple overnight.”

But, says Cooke, global warming is also playing its part:

“Global warming is having a huge effect as well. With saw this with tomatoes. The tomato season in runs from September to September in Europe. We contracted our prices in August last year and we saw probably a 60% to 70% increase in tomato prices and that was down to energy prices going up from the war and also global warming, which meant the crop was 50% down.”

Having lived with the situation for a while, Cooke says it is perhaps inevitable that people are now starting to see it filter through to supermarkets. “It’s happening now because this is when the prices have been passed through,” she says.

The solutions to this are tough, but Cooke suggests some simple tips for dealing with it.

“Just honesty and transparency to our customers and keeping them in the loop as much as possible. We get as much market information as possible from our factories and suppliers and farmers to get crop reports and so on.

“The more information you share with customers the more in the loop they are and the more flexible they are on things like price increases. There are things we can do, too, like lower our margins for customers on bigger volumes.

“But also, we’re looking to increase pallets and they get a decrease in transport rates that way. We’re also looking to consolidate ingredients on pallets to keep prices down. Anything we can do to help, we will. But we are a business at the end of day, and we have to make money.”

Cooke says there is good news on the horizon, in that they have started to see some ingredients coming down in price. But, as she points out, “that's not going to be passed through to the supermarkets for a good few months yet”.

Martin Barnett, Treat Kitchen

Martin Barnett runs a food gifting business in Nottingham. The firm creates beautiful, seasonal gifts sold to about 5,000 locations around the UK, including Sainsbury’s and Asda. The business also exports its products to 21 countries around the world.

Barnett says things have clearly got a lot more expensive over the last two years.

“Inflation has hit the confectionery industry hard. Raw materials are 50% more expensive than they were 18 months ago. And transport, of course, is very expensive.”

Barnett says a lot of the hikes in raw material prices have been driven by the fact that so many were manufactured in and around Ukraine.

“That's had an effect. Glucose, has gone up 125% in the last 18 months, which is one of the key raw materials for sweets, of course. But we also do a lot of baking kits and gingerbread and a lot of the raw materials such as flour and the components for baking were originating in Ukraine.”