Food retailers and manufacturers face major dilemma

Posted by Daniel Palmer on 13th June 2008

As higher commodity prices become ‘the new normal’ rather than a temporary peak, we may see a greater impact on consumer behaviour and retailer and supplier strategies than has been apparent so far, according to a new report from Deloitte Touche Tohmatsu, “Food and Beverage 2012 – a taste of things to come”.

While current food commodity prices may come down from their current peaks, the rises already seen in the real cost of food represent a permanent shift. With consumers also being impacted by higher energy costs, economic uncertainty and a reduction in the availability of cheap credit, the effect could be significant.

Beginning in 2005, and for the first time since the 1970s, food prices have been increasing substantially. In 2007 alone, wheat prices rose 52 percent while the UN Food and Agriculture Organization reports that its global food price index rose 40 percent compared to only 9 percent in 2006.

These rises, coupled with increasing nervousness about the security of food supply, are likely to have profound effects – on consumer behaviour, on retailer strategy and on the responses of suppliers and primary producers.

Dr. Ira Kalish, Deloitte Research’s Consumer Business Director, believes that the escalation of prices has already led to changes in consumer behaviour. “We are already seeing signs of higher food prices leading to a shift in purchasing patterns towards lower-priced private label and discount products and shopping at low-priced retailers,” he claimed. “It could also result in a shift away from eating meals in restaurants and bars – as was the case in the last economic downturn.”

Lawrence Hutter, Global Consumer Business Lead at Deloitte, added that retailers in price competitive markets have to face the dilemma of the extent to which they absorb rising prices. “In recent years, price increases by retailers have required real product differentiation, strong brand equity, innovative products or services and a superior customer experience,” he said. “Consumers switching from eating out to shopping for food for home should protect growth. Price inflation also presents retailers with an opportunity to protect and enhance margins as consumers become more accepting of price rises.”

In the longer term, global food price stability should return, although it is reliant on a number of factors, according to Dr. Kalish. “If market forces are permitted to function, food production will expand, land efficiency will increase, and prices will ultimately come back down. However, agriculture is one of the last bastions of intense government involvement in the market.”

“Therefore, retailers and suppliers must prepare for various scenarios, including the worst with continued rises in commodity prices and slowing consumer spending. They must exhibit flexibility, minimise costs, maintain multiple supply chain choices and clearly differentiate from competitors,” Dr Kalish concluded.

“Food and Beverage 2012” was created following 90 interviews with board-level executives at manufacturers, retailers and food service companies from around the world, as well as a survey of over 1,000 consumers.

The report, which can be accessed online, identified seven key strategy and execution issues as suggested by the survey respondents: