Article courtesy of Exceedra Pty Ltd

Two years into the pandemic and we’re seeing some long-lasting negative effects on food retailing. Continually rising costs on a number of fronts raise the question of who pays for it in the end – the manufacturer, the retailer, or the consumer? How are manufacturers and retailers likely to cover costs, and is the consumer prepared to pony up the difference?

We’re currently in a perfect storm of rising prices on a number of fronts. Inflation, rising consumer cost of living, sky-high petrol prices due to the war in Ukraine, interest rate rises, increased operational costs such as gas and electricity, continuing supply chain issues, and a tight labour market resulting in wage rises.

Specific to food retail, ecommerce has and will continue to increase the cost of doing business through both picking (wages) and shipping costs. Staffing costs are the largest operating cost for most retailers, and total wages for food retailers can typically be 11-13 per cent of sales and in some categories such as fruit and veg, over 30 per cent of sales¹. MST Financial predicts and additional 2-3 per cent wage inflation for retailers over the next two years, linked to broader wage-setting mechanisms.

Consumers now look to save rather than treat

Compared with 2020 and 2021, where lockdowns meant consumers were treating themselves to ‘little luxuries’ and trading up in many food categories in the absence of being able to spend on entertainment and travel, the reverse is now true. Near-record levels of inflation, not yet matched by wage rises in some markets, means many consumers are feeling the pinch.

Many consumers are now trading down across and within a categories. Becoming more price and discount sensitive. Which means that heavily discounted products only serve to further trade consumers down and reduce basket spend overall.

Nervous consumers are choosing products based on brand trust and previous usage. Sticking to what they know rather than experimenting, unless they can save. Dependability and affordability are the name of the game, so new and lesser known brands and products have to work harder to achieve penetration, familiarity and trust via presence across multiple touchpoints.

The Outlook

We’re not likely to be out of the woods for another 12-18 months, although some impacts are shorter term than others. Supply chain driven product price rises may see another year for prices to normalise. Until then, profit margin pressures on manufacturers due to raw ingredient costs will continue to see price rises passed on to retailers. The question is whether if those are then passed to consumers, whether consumers will pay. Current indications are mixed at best. If retailers are unable to pass on costs to consumers, then they may seek cost recovery through higher trading terms with manufacturers.

The current environment means brands and retailers need to at least maintain consumer basket spend. Occasion based marketing, such as for socialising and entertaining occasions or for a small treat, may assist in providing context for an AWOP or premiumisation based promotion rather than a price discount.

In some ways the past two years has been a shakeup for the FMCG industry that requires noting and tracking to provide a better guide for the next few years. Behaviours have changed and continue to, and we need to build those changes into our future plans.