The latest inflation numbers are out, reinforcing that the UK is in exceptionally difficult times. Not only is inflation running at 10.1% fuelled by high food prices but real average household income is falling more rapidly than at any point in the last decade and consumer confidence is at record lows.
Many commentators are making links to the oil shocks of the 70’s or looking at the last recession to understand what might happen now. Whilst there are learnings we can take, the current situation is different in many ways.
The headline numbers disguise huge variation by retailers, category and brand. There will be winners and losers in our marketplace. Here are a few of our thoughts…
Household retrenching favours Take-Home Grocery
The take-home Grocery market will be impacted but not suffer as much as other areas of the economy. Previous recessions show that when inflation bites on disposable income, households retrench into their homes, delaying big purchases and cutting back on entertainment and eating out.
Foodservice knocked back again
The foodservice sector, only just recovering from huge pandemic declines, will be hit again by declining spend. This will put significant pressure on outlets and their suppliers.
Discounter momentum continues
The obvious retail winners will be discounters. In the last few months alone, Aldi has overtaken Morrisons, and Lidl the Coop, and momentum continues to grow. Other value retailers such as UK Variety Discounters (B&M, Poundland etc) will also do well, and are often overlooked in retailer share data.
Traditional grocers should perhaps focus less on matching prices and more on their innovation and range advantages.
Retailer Own Brand gaining share
Another clear winner will be retailer own brands, partly driven by the growth of Aldi and Lidl (where branded share is relatively low). Although retailer own brands are increasing prices faster than branded, they continue to make share gains.
As more households buy these cheaper products, they will evaluate the relative quality and may feel it is not worth paying the branded premium in the future. This is a significant threat to branded manufacturers and may favour those with a mix of brand and retailer brand.
There are significant differences in the relative inflation across categories, but not all categories that are limiting price rises are seeing better volume growth; Beer, Wine & Chocolate are examples of this.
Brand power is important
There are also significant performance differences by brand. Large-scale brands tend to be more successful in getting price increases through retailers (the recent Tesco / Heinz spat is an illustration). These big brands also have better mental and physical awareness and lower price elasticity from consistent media spending and better in-store ranging. Medium and small-scale brands will be more affected due to lower awareness and greater reaction to price changes.
The current environment is different to previous high inflationary periods, but there are lessons to be learnt from them. The wide variation in performance across retailers, categories and brands will result in winners and losers over the next few years. Food Strategy Associates has a team of experts with knowledge of these previous times and deep understanding of the current environment. Please contact us if you need help navigating these turbulent times.