Plagued by inflation and the weakness of sterling, food and drink suppliers and their supermarket customers may see prices on the supermarket shelves forced upwards, in the crucial period before Christmas, PwC says.
PwC says that current climate, in which consumer food prices have been buffered from the full weight of inflation -despite rising commodity costs- cannot be maintained.
Commodity prices of consumer staples including pork (up 63.9%), poultry (up 33.6%), wheat (up 28.2%), rice (up 21.7%), tea (up 17.9%) and olive oil (up 17.3%) have increased significantly since the beginning of the year. Additionally, between May and June alone, the price of pork meat and rice rose by 20% and 10% respectively. Given those increases, PwC says that food producers, supermarkets and the wider industry will have to agree new terms, ultimately translating into a more costly shopping basket for the consumer.
Stephen Oldfield, Agrifood partner at PwC, said:
“Harking back to Christmas 2016, our tracking of commodity trends found that suppliers and retailers would need to work together to ensure costs were absorbed responsibly within the value chain.
“With food commodity prices rising 5% on average from Christmas 2016 to June 2017 we anticipate a significant price increase to come later in 2017. Food prices on the shelves have only risen 1.5% over the same period.
“October, only two months away, is a likely tipping point for the Christmas rush in demand across the sector. The rest of 2017 will continue to be a challenge for suppliers and retailers as they grapple with these underlying inflationary pressures.
“Price negotiations will be tough and require collaboration and transparent negotiation to resolve. The festive trading season is a vital time for everyone in the food and drink industry.”
Headwinds affecting the food and drink industry
- Input costs for food suppliers have continued to rise with food commodity prices increasing by 5% on average since Christmas 2016.
- The fall in sterling particularly against the dollar and the euro following the Brexit referendum, has continued to put pressure on the price of imported food items.
- Additionally, labour costs for both food suppliers and retailers have been under pressure due to the rise in the National Living Wage. This pressure on labour costs may continue as the impact of Brexit and the devaluation of the sterling impacts on the availability of labour from elsewhere in the EU.
- Retailers have been faced with mandatory requirements to report supplier payment times since April 2017. Retailers will be under further pressure to bring their payment times in line with their competitors.
Stephen Oldfield, Agrifood partner at PwC, added:
“While trading conditions remain challenging for retailers and suppliers there needs to be acceptance by all parties that there is more cost inflation to be absorbed in prices on the shelves over the remainder of 2017."