Ask FWD: The cost of inflation for wholesalers
Cost inflation has already started on products in the UK, but how high could prices get and what can we do to protect against it? FWD is on the case to find out
Is it inevitable that food prices will rise?
They’re already rising, so the only question is how fast and for how long. The shortage of labour throughout food production and distribution is driving wage increases, as is the 6.6% rise in the National Living Wage to £9.50 an hour announced in the Budget. Changing global demographics mean that competition for raw materials will get more and more intense as emerging economies demand their share.
So food is going to be more expensive, then?
Running costs too. We’re already seeing huge hikes in the price of gas. Wholesalers use enormous amounts of energy for refrigeration, heating and lighting and are going to get a shock when their current fixed-rate tariffs end. We estimate an average-size wholesaler could be looking
at a 50% increase in energy bills this winter – and that’s not taking into account possible rises in petrol and diesel prices.
It’s all too much!
It literally is, but we’re not done yet. The UK government is bringing in legislation that will add further costs across the supply chain, such as reforming Extended Producer Responsibility for packaging, a Deposit Return Scheme for drink packaging and promotional restrictions on HFSS foods. The Food & Drink Federation calculates the cost to the food and drink industry of proposed policies around public health and sustainability is at least £8 billion. Even the measures that don’t affect wholesale directly add to the cost of putting food on shelves.
What’s our main concern?
The wider perspective is the increase in the cost of food to the least well-off families. Some estimates predict double-digit percentage increases in food expenditure for the poorest households. Beneath that, there’s the threat to businesses that have already seen their margins eroded to almost nothing. Wholesalers make tiny margins at the best of times and these are not the best of times. If they are facing increased costs from suppliers, how much do they pass on to the retailer or caterer and, therefore, to the consumer? It’s not hard to guess the answer to that one.
So it’s all about margin?
Shared margin, yes – and careful planning to spread the burden of increased costs. Customers in the convenience sector like the reassurance of price-marked packs, but it’s a gamble for the retailer if they’re selling at
a fixed price and the wholesale cost is rising. So it’s a delicate balance, and suppliers and wholesalers are going to need to get together and think very carefully about their promotional strategies.
One suggestion from a senior wholesaler
is that suppliers look at the multipacks and sharing bag offers they have in the multiples, which will come under scrutiny anyway in the anti-obesity reforms, and shift margin from these to increase it on PMPs in convenience. That pre-empts government intervention on health grounds and less packaging demonstrates a willingness to meet sustainability targets.
Do you think they’d do that?
Don’t know, but we need fresh thinking like this and we need to be getting plans in place right now.