Focus on Irish Grocery Inflation

Market Share

Kantar?data for 12wks 23/01/23 to 16/04/23 sees?Dunnes?maintain first place with 23.2% market share. Tesco?follow in second with 22.4% and SuperValu?third with 20.7%. Lidl?and?Aldi?follow with 13.3% and 12.1% respectively. Groceryretail?sales grew 11.5% driven by?inflation?which hit 16.6% according to Kantar.

The headline news was that food inflation had stepped back slightly versus the previous month. However, in the same week that Irish supermarkets dropped the price of milk there was an interesting uproar. Consumers were happy to see some price decreases but are still paying more overall for their groceries every month. Dairy farmers were warning that farmer livelihoods were under threat from the shelf-edge price drops. Politicians were outraged at the alleged gouging of the supermarkets, saying the milk price drops were a PR stunt and calling for price caps and competition authority investigations.

Why is food inflation ahead of the overall CPI?

This time last year food inflation was only 4.7% when the overall CPI was 7.0% - a lag generated by retailers pushing back assertively against manufacturers. Apart from the big beef and dairy companies, the vast majority of Irish manufacturers are SMEs who lack strong buying power and cannot simply demand lower ingredient and input costs. So there will also be a time lag if commodity prices start deflating.

The UN FAO food commodities index for April ’23 is sitting +25% versus 2020, wholesale electricity prices are still 3 x 2020, minimum wage is up 12% in the same period. So we should expect food inflation to start aligning more closely with the overall CPI as we overlap last year’s inflation but I see no reason to expect food deflation any time soon.

What about shopper behaviour?

If the rate of food inflation is moderating it doesn’t mean prices are dropping. It just means they’re increasing at a lower rate but shoppers are still paying more every month.

The headline inflation number doesn’t fully reflect shopper behaviour. Prices are up 16.6% YOY but shoppers are ‘only’ paying 14.0% more for their groceries because they are switching to more private label, redeeming more coupons and buying less volume overall. PL sales are up 15.6% YOY versus brands at +8.0%.

Shoppers don’t think about things on a strictly ‘year on year’ basis. There’s now, and there was a time before the inflation crisis. To get a better understanding on shopper sentiment we need to look at food inflation on a 2-year basis. It’s a continuously upward trajectory with 2yr food inflation +21.3% for the 12 weeks to 16th April.

Before the pandemic 50% of Irish consumer’s food & drink spending was outside of the home. With a rough 5:1 cost ratio, households will find bigger savings by changing their out of home habits and my HORECA contacts are pointing to a noticeable slow-down post-Easter.

What can we learn from milk price drops?

The prices that Irish dairy farmers are paid are heavily influenced by global supply/demand dynamics. If demand is softening then processors cannot demand the same price and must pay less to farmers and this is eventually seen in the price that retailers charge to shoppers. And if retailers didn't pass on the decrease they would be accused of gouging. But the recent milk price drops are also partly rooted in the supermarket’s overwhelming urge to reverse the recent inflation spike. Overall supermarket volumes are down around 2% YOY and this makes everything about their supply chains less efficient than it was before. Demand planning gets tricky and in-store waste becomes a problem. Suppliers all across Europe are talking about a growing tide of downward cost pressure coming from supermarkets. So if there’s a glimpse of an opportunity the supermarkets will be on it because it might drive volume and reduce waste. Incidentally, British retailers had decreased milk prices in mid-April based on the same dynamic of falling wholesale milk prices.

Gouging?

The accusations of supermarket price gouging coming from politicians are interesting. Tesco Chair John Allan got ahead of this in?Jan-23 when he suggested that some suppliers may be guilty of the same activity. But would a competition authority investigation validate the claims? I think it would only be able to draw useful conclusions if it was based on an intimate understanding of how supermarket pricing actually works. It would need to look at how Irish supermarkets closely monitor each other with a deep fear of being ‘caught out’ on a core KVI line or basket comparison. It would also need to understand how retailers price the core range of 1,000 high-volume lines versus the other 20,000 SKUs on sale. Or how the retailer balances high-margin products with low margin or loss-making SKUs. How private labels and national brands are combined to present a competitive proposition to shoppers that also delivers the necessary margin mix.

It would also need to recognise that food prices were either static or deflating for ten years from 2011 to 2021 driven by competition and the supermarkets' desire to protect and grow market share. And before government jumps to consider retail price capping it would need to look at the long-term relationship between retail prices, cost prices, product origin and how supermarkets can drive continuous downward cost pressure which can cause indigenous producers to be displace by cheaper imports. ?Without this detail, any investigation will fail to truly judge if Irish supermarkets are gouging.

Intervention?

I think that a ban on below-cost selling might deliver more long-term benefits than a price cap. Shoppers would get to relearn the true value of food, buying less and wasting less. Retailers could rebalance their polarised margin mix structures and would be forced to differentiate through innovation rather than just dropping prices. Indigenous producers could invest in more efficient production to deliver more eco-friendly produce, with less food miles, creating greater economic impact and a more resilient and self-sufficient supply chain - all of which we will need when the next shock inevitably comes in this volatile and uncertain world.

Malachy O'Connor (founder at Food First Consulting, Ireland Partner at IPLC and The Uspire Group)