What is the outlook for future food inflation and how might labour challenges impact inflation prospects?
19 July saw a move to step four of the Government’s plan out of lockdown, which removed restrictions on social contact. With the full opening of the hospitality sector underway, we examine how foodservice supply chains might be coping and the prospects for future food prices.
How useful is CPI (Consumer Prices Index) data to predict inflation?
It is quite customary for organisations to want to measure the change in prices over time and quite rightly so. The Office for National Statistics (ONS) monthly inflation and pricing release of CPI data is often that principal index of choice. And why not? It is the official measure of household inflation, and it is easy to access and requires little expertise to distribute. Hence it is a particularly popular choice for many organisations that cannot draw upon inhouse expertise like allmanhall’s team of Category Buyers or via Foodsight, allmanhall’s insight report publication.
CPI food data is very useful, but not when used in isolation. It is a backward-looking index that measures historic price movement via a weighted household basket of retail goods. Determining to what extent retail prices have changed over the past year may not help those that need to budget for the future!
What is the outlook for future food prices?
Global food prices
A good place to start is to examine what is happening to global food prices as these have the greatest pull-on UK food prices.
- Global food prices have been steadily climbing over the past 12 months (FAO Food Price Index +33.9% higher than prior year).
- Global food prices are significantly higher in real terms than those in both 2018 and 2019. We can in this instance rule out ‘base effects’ distortion as price indexes are well above pre-pandemic levels.
- All five key commodity groups have increased significantly on a global level. These are vegetables oils, cereals, dairy, meat, and sugar.
- 2021 global food prices are nearing those of 2011, which still represents the 60-year high.
- Global shipping costs are at a ten year high fuelled by Chinese demand for iron ore, a key ingredient of steel. This impacts food prices as 60% of global food miles are attributed to sea freight.
- Broad based industry wide inflationary pressures across ingredients, packaging, transportation, and labour are more likely to lead to foodservice cost increases. The active management of food wholesalers, product ranges, brand management and adopting a category management approach will help to offset impacts.
What price changes are UK food manufacturers experiencing?
May ONS Producer Price Index shows significant increases in the prices that UK food manufacturers are paying for their inbound raw materials, leading them to pass on price increases via a rise in outbound goods (these are prices passed on to retailers and wholesalers).
- Inbound cost increases (costs to food manufacturers)
- 12-month home food materials increase of +9%
- 1-month increase of 3.7%
- Outbound cost increases (costs from manufacturers to retailers and wholesalers)
- 12-month rate of 3.1%
- 1-month rise of 0.7%
It takes time for changes in food commodity prices to feed through the supply chain to caterers, typically three to six months. Changes in food commodity prices do not pass through in full, as consumer food prices include the shipping costs of primary food commodities, the processing, marketing, and packaging of food, and final distribution costs such as transport costs.
Will the UK labour shortage of drivers and pickers impact future prices?
It certainly has the potential to drive up costs if the shortage is sustained for a prolonged period. A shortage of 60,000 drivers has the potential to push up wages and in turn goods prices. There is plenty of anecdotal evidence to suggest that foodservice distributors and manufacturers are having to increase salary packages to retain existing drivers and to recruit new ones.
Driver salaries are not the only costs incurred; supply disruption to inbound deliveries also adds cost to manufacturers, wholesalers, and caterers alike. UK hospitality demand also has the potential to exacerbate labour shortages and service disruption. OpenTable data shows that seated diners walk ins and reservations are 20% higher than the pre-pandemic corresponding period in 2019.
Where else can we find signs of potential food inflation?
With global food manufacturers annual input prices rising by 26%, it is useful to check what our industry membership bodies, and globally listed food companies are reporting.
Many well-known food companies have posted warnings to investors about future food inflation including Kraft Heinz, Mondelez, Nestle, Unilever, Kellogg, General Mills, Campbell Soup, Coca Cola and Hain Celestial.
- Unilever have stated that it is experiencing the highest levels of food inflation “in about a decade”.
- Nestle CEO Mark Schneider said “From what we can see now, inflation is very much a 2021 and, to some aspect, also a 2022 phenomenon. This is a very volatile environment right now with very low visibility, lots of surprises happening, and again, we will take pricing action, and we have taken some pricing actions already.”
- Bidcorp are reporting a ‘number of macro challenges’ are starting to emerge such as ‘inflation and labour shortages’ which are representative of the broader based challenges facing organisations operating in the UK. Bidcorp continue to state ‘We are seeing large increases in the price of vehicles and mechanical handling equipment (and a total lack of availability), construction costs are escalating quickly. All of this will likely lead to wage inflation. We are also unbelievably facing a labour shortage in many markets where the recovery has been quick and sharp, particularly in driver and warehouse roles.’
- Sysco, the owners of Brakes, whilst not specifying inflation within its International Division, reported via its third quarter 2021 results that it had experienced 3.5% product cost inflation in the US.
- Ian Wright CEO of the Food and Drink Federation has flagged a potential domino effect of staff shortages upon the industry, with shortages in farm pickers, drivers, abattoir workers, manufacturer process operatives and the hospitality sector. These shortages appear to be structural which could create “a war for workers that can only have one consequence for everybody, an increase in prices” and he is expecting “mid-single digits” inflation across the whole food basket, adding that some commodities ‘have already had double digit’ rises.
Expert procurement partners allmanhall help clients manage food inflation by working collaboratively to identify cost improvement opportunities through targeted category and range management, leveraging supply relationships, and by using expert insight to deliver better procurement outcomes.