The private label scenario 2022, the Global Food Inflation.

2022,

the Global Food Inflation

Cost spikes on energy, packaging, transport, covid protocols an labour availability have heightened inflation. What will happen in the upcoming year? An analysis by IPLC.

In December 2021 the IPLC team held an online seminar on the topic of food inflation attended by 185 industry professionals from more than 20 countries, primarily manufacturers from around the world. When surveyed, 100% of companies told us that they had taken cost increases across all of their key inputs in the previous 12 months, including food ingredients, packaging, energy, transport and labour. Effectively, all of the big-ticket cost items in the manufacturer P&L were seeing significant inflation. Some of us will remember that a similar food commodity cost spike happened in 2007-8 around the global crash, and again in 2011 around the sovereign debt crisis. But in 2021-22 the impact is heightened by the additional cost spikes on energy, packaging, transport, covid protocols and low labour availability.

Further, in 2008 we saw the food commodity cost spike reversed within a year, but in 2011 it took 5 years for the cost inflation to fall back, so who could predict what might happen this time? Add to this the fact that limited range discounters have grown strongly in most markets. Taking the Irish market for example, in 2008 Aldi and Lidl had combined 10% share whereas in 2021 they have >25% share of the market. In the last 10 years, the mainstream retailers have developed competitive strategies to counter the discounters, focusing on private label core ranges and EDLP price matching. As a result there has been a de-facto price freeze on the highest volume, highest value PL products which now constitute a significant proportion of items placed in the average trolley. So it is incredibly hard for suppliers to achieve a cost increase when the buyers are required by their bosses to hold steady on retail prices, and so many of the retail prices are matching the limited range discounters. But possibly the greatest challenge is that the majority of the category buyers that suppliers are dealing with are less than 30 years old and have no memory of the cost spikes in ’08 and ’11. They have only known deflationary price changes in the last 10 years and lack the experience to manage inflation.

1Suppliers are not requesting the necessary cost increases, possibly because they are stuck in a contract. This would seem a risky and unsustainable strategy given what we know about tight margins in food and drink production. Very few manufacturers have the reserves to indefinitely postpone cost increases of this magnitude but they are very wary of damaging the relationship with retailers.

2Retailers are paying cost increases to their suppliers to help maintain good long-term relationships and on-shelf availability, but they are holding back on passing these on to consumers for fear of losing their competitive position. Again, this would seem unsustainable, especially if the cost inflation hasn’t yet peaked and could take several years to fall back. But if retailers are holding back pre-Christmas, there will likely be movement in the new year.

3Retailers are delaying or refusing to accept supplier cost increases and suppliers are selling below cost and crossing their fingers, hoping for their input costs to fall in early 2022.

In reality there’s a mix of all three options happening but all are risky, even in the short to medium term for three reasons.

Business failures. If suppliers don’t achieve cost increases with their customers then their financial position is weakened. If this is allowed to continue, then there will be industry consolidation and some companies will cease trading. Loss of trust. If retailers and suppliers push back too hard on cost increases then someone, somewhere in the extended supply chain could cut a corner. After the cost spikes of 2007-8 and 2011 we observed an increase in high profile food fraud and food safety incidents. If your company gets caught up in one of these incidents the reputation damage could be even more damaging than trading at a loss. The end of cheap food. We know there is a climate crisis and that global warming is causing sea levels to rise. This is already reducing the amount of suitable land available for food production due to saltier soils and flooding. We also know that climate change events will make crop yields much more unpredictable. And we know that the human population will increase by 25% in the next 30 years. So, if the first major food inflation in a decade is a challenge right now, then food security is going to be the emerging problem in the next few decades.

Conclusion The challenge remains for the overall food and drink supply chain to make sustainable profitability a priority at all levels. And this is eminently possible if all players take an honest and transparent approach. And if retailers claim that consumers simply won’t pay more for food then think about how we got to our current situation. Prices haven’t deflated over the last 10 years because consumer were unwilling to pay. Prices have deflated due to retailers fighting for continuous sales growth and market share. And a portion of the money saved by consumers was simply redirected to spend on food and drink in cafés, restaurants and hotels instead! In future, our grocery retailers are going to have to find new ways to compete other than price. Otherwise, local suppliers will go out of business, farmers around the world will exist in poverty, and sustainable employment will be lost in the communities in which they operate. Remember March 2020 when suppliers moved mountains to keep up with the demand prompted by panic buying and lockdowns? Well, 2 years later, those suppliers need their retail customers to exercise that same collaborative spirit, paying a fair price that recognises the inflationary crisis we’re in right now.

Malachy O'Connor Irish partner at IPLC-International Private Label Consult.