How Rising Food Prices Will Impact on Retailers

We're already half way through 2013 and have seen some of the expected rise in food prices, however there are more on the way with this year predicted to see the largest hike in the cost of food and grocery items for a long time.

Mark Price has been preparing his Waitrose customers to expect "massive" rises in food prices as has Tesco Boss Philip Clarke, warning of escalating food costs over the next decade and the era of cheap food being over. J Sainsbury are getting involved in government funded research into agricultural practises that will benefit the food industry and invest in more locally grown food with an eye on the longer term future of sustaining a much larger demand for food.

The food price increases currently are environment led with wet weather in the UK and parts of Europe and drought over in the USA, both of which have caused crop failures and difficulties for farmers, seeing UK food inflation increasing. Combined with recent poor harvests globally in large arable growing nations such as Russia and the Ukraine stocks are at an all time low. 

The meat industry has also recently been hit by scandal and retailers are addressing consumer concerns by investing more in UK supply chains, which again has cost implications. Consumer research has indicated however that we would be happy to pay more for meat products if the farmer was the beneficiary.

Longer term the global economy will impact on food prices as the world population keeps growing rapidly and demand outstrips supply. Dietary changes in developing economies and growing middle classes in China and India also impact in pushing up food prices. As Philip Clarke has said Tesco are now competing with global retailers when buying in regions such as South Africa, whereas previously they were the only buyers.  The crude oil and food industry are intrinsically linked as one pushes up the price of another - all of which impacts on living costs for the consumer.

So what does this all mean for our retailers?

As the average family feels the squeeze of rising prices their shopping habits change accordingly. Retailers see less loyalty as people shop around looking for the best bargains, supermarkets such as Aldi and Lidl are really benefiting from the recession and attracting shoppers from the big four.

Branded products also suffer as consumers look for the best value for money with unbranded or supermarket own brand products. People have less brand loyalty as they look for the offers and discounts and switch brands accordingly. The use of technology in store allows shoppers to see if they are really getting the best value for money.
 

Part of the reason food prices have been cheap for so long is a mixture of low cost imports and supermarkets pushing down prices in price wars. As the imports are becoming more expensive and production costs increase retailers have no choice but to put up their prices. Co-Operative are already feeling the effect on their food sales, seeing a decrease in profits in the last four trading period.

As prices increase pressures on retailers to make sure that your pound is spent in their store is not a bad thing from a POS and display point of view. More in store promotions need advertising and that means a healthy continued supply of print and display materials.

Retailers will have to work harder to show consumers that they offer the best value for money and that bargains can be had. I think we'll see a lot more of the BOGOF and other multiple type promotions, greater rewards for loyalty cards encouraging shoppers to stick with one supermarket and reap the benefits. Focus on customer care and added value experiences in store will attract shoppers as the likes of John Lewis have proved in their business model.

We are also seeing supermarkets tightening up on their supply chain to find extra savings and increase profits. Closer monitoring of their estates and POS needs to ensure materials are not overproduced and discarded where it is not needed. This is an excellent way to save money and it all starts with site surveys and store audits, which we are completing more of as retailers look at ways to save. A little investment up front can save millions down the line as print supplies are streamlined and more accurate.

Interesting times ahead - there's no doubt the era of cheap food is indeed over and how retailers react to that will probably see some change in the current dynamic of the supermarket giants.