In 2013, predictions for UK food and drink prices in 2014 were for continued inflation at around 3.5% – as the graph above indicates, the reality was a very different deflation of up to 1.5%, though this is more like 0.5% inflation for foodservice (see explanation in Summary below).
So what at was it that caused the disparity between the forecast and the actual performance? Below are detailed some of the key factors affecting food and drink pricing in the UK during 2014, as presented by Prestige Purchasing in a comprehensive briefing last week– all will need watching for 2015!
Weather
The weather in 2014 has been significantly better than expected, and more consistent than in previous years. Although there were significant local or regional issues (the flooding in the Somerset levels would be a good example), farmers have been able to sow and grow in relatively positive conditions and there have been fewer issues with crops.
Oil
The price of oil has dropped significantly – around 21% for the year. This has happened almost entirely in the second half of the year, and there is now surplus product in the market due to a slowing in demand, which is expected to drop further. At the same time, fracking activity in the US is ramping up.
Because the pound has been growing weaker compared to the dollar, and oil is priced in dollars, we have not seen the full benefit of this at the petrol pumps, with our fuel prices only dropping by around 6.5%.
This directly affects the input costs for a large volume of food packaging as well as cost of storing and transporting food and drink.
Economics
Whilst the performance of the £ against the $ has been disappointing of late (since a high of 1.71$/£ in July – the rate is currently around 1.56$/£) versus the € it has been strengthening over the year (a low of 1.18€/£ in January, the rate is currently around 1.26€/£).
The UK produces around 60% of its own food, and the top eight countries that we import food from are all in Europe. These eight, led by The Netherlands, account for around 25% of our food production (Global Food Security, 2014).
A strengthening £ against the € therefore means that, potentially, the cost of 25% of our food goes down, which is good news for the UK consumer and bad news for UK producers (whose products are both proportionately more expensive in the UK and more expensive when exported).
Competition: supermarket price wars
Possibly the biggest reason, however, for the contrast between our forecast at this time last year, and the actual level of food and drink inflation recorded by ONS is the impact of the ‘price wars’ between the large retail brands.
The impact of discounters like Aldi and Lidl becoming more widely accepted by consumers is huge and the historic big four supermarkets have struggled to deal with it: slashed prices mean that consumers are paying lower prices for many products.
There has also been a sharp rise in the number of food producers becoming insolvent this year, 146, up from 114, which could be related to pressure from supermarket customers to lower prices.
Summary
A range of unexpected factors have combined to drive down the prices consumers are paying for food and drink.
For the Foodservice Sector, the first three factors described above – weather, oil and economics – have contributed to a reduction in pricing, with most clients not seeing the big increases in prices as they were in 2013.
However, there is limited evidence of pricing in the Foodservice marketplace that is actually cheaper than at this time last year.
At a sales level, Foodservice accounts for around 42% of food sold in the UK, but in terms of volume of product, this proportion is much lower (and the average sales price of food in Foodservice is much higher than in retail).
The inflation figures reported by ONS are skewed towards retail purchases, and based on the evidence Prestige Purchasing is seeing in the Foodservice Sector, they believe that the real food and drink inflation position in Foodservice could be up to 2% higher than that reported by ONS, resulting in 0.5% inflation rather than the 1.5% deflation seen by consumers.
And for 2015?
All the factors above – and potentially more – can affect food and drink prices in 2015. H&C News will examine and present Prestige Purchasing’s predictions in our next article…
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