The business impact of food price inflation

There has been widespread media coverage over the past few months in regard to food inflation and the further threat to supermarket and restaurant prices as we head towards 2022. Official data recently released reported consumer price inflation of 3.1% whilst the Bank of England has forecast inflation could rise in excess of 5% by early next year.

Why is this happening?

There is a global trend by which we see food sector sales have recovered since the lockdowns of the Covid-19 pandemic, whereas capacity in supply, processing and logistics has not. Fresh supply and low stored inventories of commodity ingredients are insufficient to fulfil surging demand and coupled with broken global supply chains, this means the prices of key food commodities are trending sharply upwards, with significant volatility, often reaching recent or historic highs across the board.

As an example, Mintec’s UK Oils and Fats Index shows a year on year increase of over 40% with EU delivered crude palm oil up 57% over the last 12 months, reaching a 10-year high. On top of commodity inflation, indirect input costs for every product on the shelves or in menus are overwhelmingly increasing, driven by both global and local influences. These cost factors driving inflation are primarily reduced or displaced labour supply, logistics availability issues & HGV driver shortages, packaging pricing surges, utility volatility spurred on by the recent gas crisis and globally high oil and fuel prices.

Mintec’s UK Packaging Index (comprising paper, plastics and metals) has surged by 58% year on year, and they report that freight costs per container from China to the UK have increased by close to 500% in the last year. Throughout the broad spectrum of food categories, further inflation is expected into 2022 as more suppliers seek to pass on their increased costs and long-term fixed contracts come to a close.

The consumer is already experiencing unprecedented food inflation when doing the weekly shop and eating out and will increasingly shop around for the cheapest prices and best value, so how do buying teams reduce their own spend and negotiate best prices with suppliers to keep their products competitive in the market?

Firstly, understanding the key commodity drivers of price within a product is essential, as well as being informed regarding the specification and country of origin of these commodities. Buyers can review market data specific to these elements for historic, current and forecasted pricing and can therefore interrogate and review justifications for supplier price increases with confidence.

Greater understanding and insight comes from building a cost model, or cost bar, for a product. Total cost is apportioned to individual spend elements and the weighted impact of each commodity or input cost component can be modelled, both looking backwards and into the future. Understanding the building blocks of cost can help a buyer make better informed decisions in a negotiation with a supplier, or strategically target cost mitigation activities towards the spend elements that impact most on the final cost build of a product.

This period of high inflation is expected to weaken in the second half of 2022 as current prices are not justified by the fundamentals in supply and demand. 4C have access to market leading insights and intelligence and category experts in commodity management that can assist with effective cost modelling. We can support your buyers with precisely creating cost bars to better understand commodity price impact and take an informed approach to managing price inflation. With our expertise, your buyers can capitalise when prices begin to fall as well as hedge or fix contracts at the optimum time when trends change or costs look attractive versus selling price models, helping you unlock best value in your F&B categories.

Please contact  Mark Boswell, Head of Food & Beverage Practice at 4C Associates at mark.boswell@4cassociates.com or Gavin Bowen-Ashwin, Head of Hospitality at 4C Associates at gavin.bowen-ashwin@4cassociates.com  if you would like to understand more about cost modelling.

To contact 4C Associates, book a meeting with us here.

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