Business Leaders’ Forum

Food price cuts may be on way as inflation returns

By Noli Dinkovski

- Last updated on GMT

Many food manufacturers will have ‘uncomfortable conversations’ with their retail customers in the next six months, predicted Clive Black
Many food manufacturers will have ‘uncomfortable conversations’ with their retail customers in the next six months, predicted Clive Black

Related tags: United kingdom, Euro

Food manufacturers need to think strategically if they want to avoid the threat of retailers demanding price cuts as inflation returns, a leading City analyst has warned.

Any domestic food manufacturer that doesn’t have insight on what pricing does to consumer behaviour is going to have some very “uncomfortable conversations in the next six months”,​ claimed Shore Capital analyst Dr Clive Black.

Black was speaking at last month’s Food Manufacture Group’s Business Leaders’ Forum, held at the London offices of host sponsor DWF, and also sponsored by RSA Insurance Group, packaging specialist Charpak and analytical testing provider ALS Life Sciences UK.

His comments come on the back of strong retail trading figures for the second half of 2016 and the Christmas period.

In the wake of growing consumer confidence, Black suggested that sterling was now more likely to recover in 2017. It fell to a 31-year low against the dollar and a six-year low against the euro following last June’s Brexit vote.

‘Be careful what you wish for’

However, he said “be careful for what you wish for”,​ because if sterling does appreciate “those retailers will be back on you like a flash, saying ‘let’s have the price cut’”.

“What ‘Marmite-gate’ taught us was that UK supermarkets are not going to be an arbiter for companies outside the UK that have got earnings denominated in dollars and euros, to be supported by British shoppers,”​ Black said.

“As a result of that, I see import substitution, I see national brands, and I see own-label getting an enormous boost,”​ he added.

Black said the multiple retailers were now, broadly speaking, in “a better place”,​ following a difficult few years.

“But they’ve still got depressed margins and very poor returns – much worse returns than the manufacturers, I should add, and that means they are going to be hard work this year,”​ he added.

‘750,000 extra mouths to feed’

“However, they need product, so if manufacturers are strategic rather than tactical, I think the future is bright. The UK population is rising at 1.25% a year – that’s 750,000 extra mouths to feed – and inflation is coming into the system.”

In contrast, Black suggested that if a manufacturer hadn’t yet demonstrated the need for a price rise, seven months after the referendum vote, it’s “going to be harder”​ to get those price rises through.

“It’s easy to use Brexit as an excuse for performance downside, but I just don’t think that’s plausible. There are one or two specific issues where Brexit has had a knee-jerk effect, but in the main, the consumer has been much more robust in the second half of the year than just about anybody forecast,” ​he said.

“So, the market dynamics to me are not there to simply bang the table and say you need a price rise.”

Meanwhile, find out how Black predicts the future for manufacturers’ relationships with their retail customers will develop in this exclusive video interview​.

Related topics: Supply Chain

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