Uncharted territory for the EU food industry
Meat consumption is already dropping in the EU but it will fall further, as inflationary pressure will take its toll on the sales. The current cost inflation in food is unprecedented, according to the team of analysts from Rabobank. Agri commodities, packaging, transport, energy, or personnel costs, all have shown a massive price increase, says the most recent Rabobank report on consumer foods.
"The current tremendous inflationary pressure on the cost base of virtually every food producer has yet to be absorbed further downstream in the supply chain. Will it be the consumer, the food retailer, or the foodservice operator that ultimately picks up the bill? Or will the problem be pushed back into the chain?", says the report.
The exact magnitude of the cost inflation is difficult to gauge. Supplies are often covered by contracts, so the actual contracted prices and timing of contract renewals will differ from company to company. Moreover, the cost inflation a company experiences depends on the type of products it produces, which raw materials are used, and where products are sourced.
Nevertheless, the prices are expected to go up by 30% for some products and meat products are very close to this. "On average, suppliers are looking for about 9% to 10% higher prices (PPI) toward retailers and foodservice companies to cope with the inflated costs. One thing is for sure, given the average operating margins in food production, not many producers will be able to absorb the cost inflation in their own operation. Many producers made it abundantly clear that subsidizing their products was not an option, so negotiations will be tough this autumn," warned the analysts.
Given that neither the food producer nor the food retailer are able or willing to absorb the cost price inflation in full, the consumer will likely be confronted with higher grocery prices sometime in the early months of 2022, though not necessarily in one go. Food retailers may choose to raise consumer prices in phases in order not to upset the consumer too much.
The good news for most consumers is that they have means to circumvent that inflation in their budgets by trading down to cheaper products or cheaper channels: buying ground beef instead of steaks, opting for private label products instead of brands, shopping at hard discount instead of full-service supermarkets, or having dinner in a QSR outlet rather than a fast-casual restaurant.
To make it more complicated, this trading down by the consumer may trigger substantial volume shifts in demand, which both food producers and food retailers will need to factor into their decisions on how to deal with the unprecedented inflationary pressure.