You may have had notification from your food suppliers that prices are changing. Although some items will reduce in price the common theme is that you will be paying more for certain items from now on.

  • Why is this so?
  • Can you do anything about it?

Why is this so?

Save for a few volatile lines, food prices have been pretty static across the board for the last 3 or 4 years. For the past 2 years or so, the Consumer Price Index (CPI) for foodstuffs has shown either minor decreases or little change in prices compared to those of 12 months previous, which has been great for budgets and planning purposes.

But things are changing and perhaps came to wider public attention in October when the ‘Marmitegate’ or ‘Marmageddon’ row saw stocks of the popular/unpopular (delete as appropriate) spread run low in Tescos. This was due to the producer Unilever imposing a 10% price hike across its range due to the slump in the value of Sterling caused by Brexit. Though now resolved, Tesco’s chairman John Allan warned that food inflation could reach 3%.

Currency fluctuations have had a 13% adverse impact on the US Dollar and the Euro. This influence of the sudden change in currency value has immediate and severe implications for the UK foodservice market. Suppliers are working to help mitigate a proportion of the adverse impact, however, it is unlikely that this will stretch to all commodities. In addition, a weaker Sterling is likely to increase exports, with the resulting rise in demand narrowing the pricing gap still further.

Other issues have also contributed to changing food prices. Dairy prices, especially butter and milk, dropped sharply 2 years ago when EU quotas were abolished for milk, which in turn led to supply outstripping demand when farmers chose to produce more milk that they were previously permitted. This trend is now reversing due to a global shortage. Years of low prices forced UK farmers to buy poor quality feed, yielding lower volumes and some chose not to replace their herds when they would previously have done so. Staying with dairy, butter production is dependent on cream, which has soared in price recently. It goes without saying that suppliers pass on these increases in raw goods to consumers.

But it isn’t just Brexit and currency issues affecting food prices.

Other influences include:

Key vegetable growing areas in France, Belgium & Holland have been adversely affected by heavy rains and floods. This subsequent limiting of crops, quality and yields looks likely to create one of the worst harvests in recent years.

A difficult position for potatoes and especially chips currently exists, with currency issues and wet weather in northern Europe applying inflationary pressures. Heavy rain and the resulting flooding have been reported at some of the main growing regions in Europe, with the potential to truly impact crop quality and quantity.

Fuelled by population and economic growth, global utilization of vegetable oils is expected to expand further. Rapeseed and Sunflower prices have jumped significantly following the EU Referendum with currency pressures taking their toll. This is unlikely to change in the short term.

Meat: Increased exports to Asia have seen supply within EU markets, for beef and pork, impact on price.

Trade news for 2016 for Salmon has so far been dominated by reports of a massive algal bloom in southern Chile that had killed some 27 million fish. This has been compounded by an expected drop in production in Norway, where growth is currently limited by sea lice issues. This is pushing up the already high Norwegian prices even further.

(Source: Brakes report Oct 16)

Can you do anything about it?

If your spend is anything more than £50k pa then you will likely be aware of price increases and your suppliers should have informed you of impending changes. Some of these changes will be significant and we have seen examples of dairy lines increasing by 40%.

Larger suppliers resisted the urge to impose a blanket percentage increase across their ranges, choosing instead to delay price reviews to review external influences such as those described. Price changes have been passed on to consumers, though not fully. For example, we noted price increases on certain cheese products of around 9% in the EU whereas an average of 6% is what we are seeing from UK suppliers.

Smaller, less ‘corporate’ suppliers may well use the various factors that have impacted food prices to their own advantage. We have come across a handful of instances where blanket increases were suggested to clients. When we have challenged these on their behalf, a more focused and less ‘shotgun’ approach to price hiking has resulted, affecting fewer lines and to a lesser degree.

But what is acceptable; what does ‘good’ pricing look like?

This is a tricky question and one that will likely take some time and effort for most organisations to answer, if they have the necessary expertise to do so.

Our advice is to speak to your suppliers:

  • Ask to see documentary evidence that their suppliers (or their raw materials) have increased prices. If not, why are they raising yours?
  • Get into the habit of having regular dialogue with your suppliers – a personal touch can prove very beneficial, especially if you make them aware that you are considering a review of food costs
  • Consider alternative items where price rises are high; ask your suppliers what else offers good value for money from their range; use non-branded rather than branded goods after you’ve had a taste test to ensure they are acceptable
  • Consolidate your supplier base if you are buying the same items from different suppliers; will any of them reduce prices for larger volumes?
  • Some suppliers may not have the flexibility to reduce prices but have leeway to increase or introduce a rebate. Talk to them to see what is possible.

When push comes to shove and you have exhausted these approaches to no or limited avail, you still retain the option of buying elsewhere. Local and Regional suppliers may be able to do better deals on certain items than national suppliers.

If you have the resource to broker such deals then it can be worthwhile, though don’t forget that ordering, receiving, storing and processing small orders from several suppliers constitutes hidden cost. You may save a few pounds on goods but if it has taken half a day a week to achieve does it make economic sense to do so?

And if you don’t have the internal expert resource to review food pricing for you, perhaps now more than ever could be the time to seek independent expertise.

Article by: Chris Wardle