British consumers face five years of 3% year-on-year food price hikes

Food and grocery inflation is set to reach 2.5% in 2017, the highest level since 2013.

The steepest price rises will be seen in alcohol and tobacco, but consumers must prepare for a 3% rise in meat and fish, sugar and sweet products, and oils and fats every year until 2022.

With margins already squeezed as a result of intense price competition and higher operational costs, the major grocers have no choice but to pass price rises onto customers.

The impact on consumers

Consumers will be more considered when grocery shopping; some will trade down and others will make substitutes to their usual basket. Basic pay rose 2% between March and May 2017, lagging behind the 2.5% average consumer price inflation (CPI) over the same period, according to official Office of National Statistics (ONS) data.

This squeeze on real incomes will continue, particularly since price inflation will boost annual spend per head on food and groceries by £440 to £3,123 by 2022, according to GlobalData’s latest report 'The UK Food & Grocery Market 2017-22'. Volume growth in food will therefore remain subdued, while discretionary spend on wider retail sectors will be curtailed.

The impact on retailers

The tightening of budgets means the discounters will continue to disrupt the sector over the next five years. Aldi overtook The Co-operative in 2016 to become the UK’s fifth largest grocer, with a 4.9% share of the market, while Lidl is vying for eighth position as it edges closer to Waitrose with a forecast share of 3.6% in 2017.

Aldi and Lidl source 77% and 70% of their core product ranges from British suppliers, leaving them far better protected to cope against currency fluctuations compared to competitors such as Sainsbury’s, which sources 50% of its products domestically. The discounters will be in a stronger position to minimise price inflation and undercut the big four, appealing to price sensitive consumers in search of greater value.

British produce to contribute to inflation pressures

The growing demand for British goods is having an additional impact on prices. Grocers are increasingly looking to source goods from within the UK to mitigate the impact of the weak pound, but international supermarkets are also increasing their mix of UK produce to reap the benefits of cheap British exports. The combination of the two has seen the price of British beef rise to an all-time high in July 2017, up almost £0.40/kg on the year according to purchasing consortium Beacon.

Similarly, British pork prices have risen by more than a third in the last year as demand from China increased due to severe flooding which caused domestic shortages. These drastic rises in demand have resulted in commodity prices rising for pigs and cattle.

With the UK Government yet to outline how the £2.1bn direct subsidies and £600m rural development payments (as per 2015) provided by the EU will be accounted for once Britain leaves the EU, we expect British suppliers to be forced to raise prices further to provide cover for when subsidies are withdrawn.