Are the big food brands in danger of killing the goose that lays the golden egg?

I have previously avoided producing an article on food price inflation for a number of reasons. Firstly, it is quite depressing as the country battles through a cold winter amidst a cost-of-living crisis. Secondly, it is hardly news as food price inflation. Every one of us witnesses it each time we go to the supermarket. And, thirdly, there is not much we can do about it, so we just have to sit and suffer.

The last point presupposes that there is a limit to the amount of ‘shopping around’ you can do, because most of the major retailers price their products within a relatively narrow band. If you follow The Grocer’s weekly shopping basket you will usually find Asda the cheapest and Waitrose the most expensive, but often there is not much to choose between Morrisons, Sainsbury’s and Tesco. Unsurprisingly, the main grocery discounters, Aldi and Lidl, have seen good growth and are pressing on with store expansion, particularly in the more affluent South East.

What caught my attention was the appearance of Tesco Chairman John Allan on BBC’s ‘Sunday with Laura Kuenssberg’, suggesting that some food producers were taking advantage of the inflationary climate to push their prices up by more than necessary and thereby to improve their profit margins.

This will probably not come as a great shock, as the 30 years from 1992 to 2022 saw food price inflation at close to zero for much of the time (and even some years of deflation). Food manufacturers had to battle with the major retailers to get any price increases and saw margins eroded.

Some might say that a period of low inflation caused UK food manufacturers to cut costs and become more efficient. However, it also stifled investment, particularly by own-label manufacturers who regularly faced retailer tendering processes with no certainty of retaining existing business. Without the guarantee of a long-term return on investment, very few new food factories were getting built.

The Office of National Statistics (ONS) published figures showing that in the 12 months to December 2022 food prices rose by 16.9%, whereas overall inflation had started to fall (but still at over 10%). Inflation is obviously bad news, as the Bank of England targets 2% and has only the blunt weapon of raising interest rates to depress demand and bring inflation back down. The more interest rates go up, the poorer most people feel and the clamour for pay increases gets louder.

The UK Government’s response to the widespread labour strikes appears to be to dig in and wait for inflation to come down to a level which matches the sort of pay increases it is willing to see in the public sector. The Government is also relying on public sympathy wearing thin as strikes drag on.

The increase in food prices can be seen to date back to July 2021 as we came out of the world pandemic, resulting in supply chain problems and resultant shortages. The war in Ukraine in March 2022 added huge increases in fuel, fertiliser and energy costs. Although it has become a taboo subject, the UK has also felt the effects of Brexit through the lack of migrant workers and the obstacles in exporting to the country’s biggest overseas market, the European Union.

The OBR has forecast a reduction in overall inflation throughout 2023 to a predicted level of 3.8% by the final quarter. However, this is not matched by the figures for food inflation, which is expected to remain in double figures as uncertainties continue and climate change becomes an increasing factor in limiting farming yields.

Percentage inflation increases can be misleading when annual comparisons come up against last year’s already steep figures. Inflation may appear to come down but prices will be historically high and remain so. Pay increases will not keep pace with food prices, resulting in many families cutting back and adding to worrying levels of food insecurity.

Some of the biggest branded players have forced through large price increases. An investigation by Which? at the end of last year highlighted products from Heinz, Dolmio and Colman’s increasing by over 40% between 2020 and 2022, with soups and sauces seeing the biggest rises. Whilst this may seem attractive to manufacturers in the short-term, the damage to brand loyalty may last a lot longer.