For many in hospitality and catering, the cost of food and drink in 2015 will be of critical importance to the success of their business. Prestige Purchasing’s recent briefing on Food and Drink Inflation in the UK is therefore of critical interest for their planning for the next year.
H&C News has just reported on Food and Drink Prices and the Lessons from 2014. Now, we turn our attention to Prestige Purchasing’s analysis for 2015.
What do we expect to see in 2015?
Here is a summary of the key cost influencers and market trends identified by Prestige Purchasing and to be expected in 2015:
Dairy: market prices on dairy products look set to stay relatively low for the start of 2015, before rising towards the end of the year. Milk products such as milk powder, butter and whey powder have all reduced significantly in price this year as a result of increased production, coupled with a reduction in demand.
Crops: mixed outlook on the arable front. The US Department of Agriculture is forecasting that the 2014 maize crop will be the largest in history and the price for this commodity has plummeted to half the price that it was two years ago. The US soybean crop is following a similar pattern.
But – global production of durum wheat is down 12% on the previous year and is expected to put upward pressure on pasta prices.
Cocoa products: consumption is growing faster than production and attempts to increase yield of this crop are much slower. Attempts to circumvent the higher cost could result in manufacturers using alternatives such as vegetable oil and flavourings to reduce the demand for cocoa in chocolate products. Prices have also been impacted by the threat of the Ebola virus hitting cocoa producing countries
Fish: notable trend in the retail fish category is the continued move from frozen to fresh and ambient, as well as the UK generally eating less fish. In Foodservice, however, most operators are interested in maximising value on the plate, which can be through fresh, frozen or ambient routes, depending on the price point, portion size and fish species.
Poultry: a new bird flu strain in the UK, should it spread, poses a significant risk to the poultry sector. The strain has not yet been found to infect humans, but does lead to wide scale culling of significant numbers of chickens and turkeys. The effects of this on pricing can counteract one another: supply is reduced as there are physically less birds, but the extensive media coverage can cause demand to drop.
Beer: the House of Commons has voted against the pub beer tie which, if it becomes law, could have far reaching ramifications including damaging investment and resulting in the closure of pubs. In Prestige Purchasing’s view it would shake up the supply market and buyers with the right insight and timing might be able to secure more competitive terms.
Duty on alcohol: 2015 is a general election year, so a significant increase in the duty on alcohol is unlikely.
Market consolidation: an increase in the level of M&A activity in the wholesale supply marketplace, such as the new food company formed by the owners of the Brakes Group and Fresh Direct. This kind of activity has benefits and drawbacks: less choice in the marketplace, in terms of suppliers, so working closely with a business that you trust becomes more important. On the positive side, there should be efficiencies that lead to lower costs within the suppliers.
Allergens: one big dietary trend to continue this year is the increase in popularity of free-from foods, and in particular, gluten free products. As well as catering for those with particular intolerances or allergies, these products are increasingly being purchased by those who simply believe them to be healthier options. From a supply chain perspective, this potentially adds complexity, with those businesses that do not make everything from scratch having to consider purchasing both regular and gluten free products. The upside is that almost half of people would expect to pay more for a gluten-free product, so there may be a revenue opportunity for canny operators.
The allergen labelling legislation being introduced has some far reaching effects. High-end operators are having to secure a balance between allowing chefs freedom to create but ensuring that they meet their obligations to provide clear allergen advice, in an environment where menus, dishes and ingredients can be changing on a daily basis.
Sugar: The World Health Organisation recently published draft guidelines to governments advising that people would benefit from reducing the proportion of their daily energy intake that come from sugars to just 5% (a 50% reduction from the current guideline amount). At the same time, the media is awash with ‘horror stories’ ranging from ‘donut burgers’ to the levels of sugar in juices aimed at children.
Ranging: the trend towards healthier products is likely to continue and smart businesses are making changes to their product ranging that give consumers a choice between healthier products and treats.
Food ethics: continued rise in consumer awareness regarding provenance, CSR and food assurance. Manufacturers are acutely aware of this trend. The sustainability of fishing practices and consumption patterns remain in the spotlight. This growing awareness places extra pressure on buyers to gain visibility further up their supply chain and to ensure that tiers of suppliers are fully audited.
Value for money: continuing practice of reducing the sizes of products but retaining (or increasing) the price. For buyers, the question then is whether or not to pro-rata the price when making comparisons.
Geographical divide: Londoners are feeling the pinch more than most as the economy remains sluggish, and housing prices in the Capital have risen dramatically. This continuing pressure could lead to consumers eating out less, or eating in establishments that offer a lower price-point.
UK Economics: continuing pressure from an underperforming Eurozone and a slowing Global economy will make rapid progress unlikely. Perhaps a small rate rise in the first half of the year, but the policy makers will need to be careful not to push the UK back towards a ‘no growth’ scenario.
World factors: the Ebola virus has killed over 5,000 people in West Africa disrupting supply chains in the region and has the potential to disrupt far beyond that. West Africa is experiencing profound trade and transport disruption in some areas as regional authorities block borders and implement roadblocks in a bid to halt the spread of Ebola.
Effect on consumers
Much of the above affects us all as consumers of food and drink. A testing economic situation looks set to see continued uncertainty around the cost of food going forwards, and whether we will still have the same income available to enjoy those products towards the luxury end of the market.
Smart businesses are finding ways of increasing the value on plates, whilst maintaining or improving margins and Prestige’s understanding of the sector shows that there are lots of organisations out there that could be doing more to deliver.
Prestige believe that consumers will continue to take a stronger interest in their food, what is in it and where it comes from, and operators and supply chains will need to adapt to accommodate this.
2015 food and drink inflation projections
The Prestige Purchasing view on likely food and drink price movement in Foodservice
Based on all of the factors described above, Prestige’s mean forecast for food inflation for the next year is 2.03%, with soft drinks at 1.48% and alcoholic beverages at 1.90%.
The graph below – Figure 15 – shows a series of ranges: the forecast range, a possible range and an unlikely range.
Figure 15 – 2015 food and drink inflation projectionsThese projections have been made taking a realistic view of the potential likelihood of each of the influencers described in this report, along with their potential impact on food pricing.
The graph below – “Figure 16” – shows Prestige’s projected movements for food inflation the course of 2015:
Figure 16 – Food price movement projections for 2015Macro-economic factors affecting prices
It’s also worth remembering and keeping an eye on the macro-economic factors that affect the prices we pay for food and drink, including:
- Economy and commerce: lots of potential pitfalls across the global economy. The Eurozone sits on the brink of recession; Germany has narrowly avoided entering recession; Japan also recently entered a recessionary period. Emerging markets are growing more slowly and the Chinese economic growth is also slowing. Can the fragile growth of the UK economy stand the pressure?
- Climate: noticeable shifts in the global climate and to the warming of the planet. In the UK there are significant weather events on an almost annual basis. Heatwaves on land areas will be longer in duration. Most of Europe, Canada and the Northern US will see more days of heavy rain. Higher frequency of droughts in some areas.
- Water scarcity: usable water resources are depleting and we are using more and more freshwater. Agriculture accounts for about 70% of water withdrawals. Around 65% of the water we use in the UK is embedded in our food. As diets in developing countries continue to move towards a more ‘Western’ diet, this will place growing pressure on an already tight supply.
- Population growth results in a requirement to produce more food. With the world population currently at around 7 billion and expected to rise to 9 billion by 2050, our ability to feed ourselves needs to develop at the same pace.
- Production costs depend, of course, on what you are producing. For those growing arable or horticulture crops, the key input costs are water, fertiliser and energy along with secondary costs such as rent on land, transport and storage, machinery etc. For businesses producing products where crops are input materials, such as breakfast cereals, bread and beer, the impact is magnified, as it effects both the costs of the input crop, as well as their own production and processing costs.
- Politics: trade embargoes, financial restraints and commercial pressure are being applied by politicians, with resulting effects on the dynamics of world trade, and in many cases the cost of food and drink. For example, the current decision by Russia to ban imports of produce from the EU. This kind of action is becoming more common and leads to supply shortages in some regions and over-supply in others.
About Prestige Purchasing
Prestige Purchasing is one of the UK’s leading specialists in procurement and supply chain management for the hospitality, catering, leisure, retail and private healthcare sectors.
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