Three key challenges for the food and consumer goods industry

Date : 31 August 2022

As the new Prime Minister is set to meet a daunting set of economic challenges, we reflect on three key challenges facing the food and consumer goods industry.

Rising food inflation

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Price rises in ‘food and drink’ accelerated dramatically in July, up 2.3 percentage points in June to 12.7% year on year. This is the highest monthly increase in prices since 2001. Food prices are now rising at a faster rate compared with other goods and services, and with no sign of the momentum slowing.

Food price inflation of 12.7% is slightly behind IGD’s forecasts for food price inflation at this point of the year although it is clear that inflation still has a long way to run.

In our latest Viewpoint report, we reported that with inflation running far ahead of previous expectations, the financial and psychological impact on consumers is severe and volume food sales have contracted. Consumers cutting back their spending is expected to result in further volume loss for food retail.

In the latest consumer research conducted for IGD (19-21 August 2022) more than half (56%) plan to cut spend on food and grocery shopping and more than four in ten (44%) plan to cut the amount of food and drink consumed at home (smaller portions, missing meals). The same research found that 11% of consumers are facing severe economic hardship as they are unable to cut back their spending further.

Access to, and availability of, the most affordable food will be critical in allowing households to manage inflation. Businesses will need to be agile to align their offer with changing consumer preferences. Consumer will be looking for government and business to provide further support to help them contend with these cost of living pressures.

Supply chain disruption

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A range of factors continue to disrupt supply chains including the war in Ukraine, labour shortages, the cost of living crisis, the impact of EU Exit and the drought conditions.

In consumer research conducted for IGD (29-31 July 2022) 63% experienced shortages of some food and groceries in-store or online recently. This is still relatively high and compares with just 55% this time last year.

The cost of living crisis and the experience of vulnerable shoppers has put a spotlight on the availability of the lowest cost items.

Prioritisation of these items across the supply chain will ensure the most vulnerable households have the best opportunity to manage food inflation. Availability issues impacting the lowest cost items are likely to lead to more meals being skipped.

As global commodity markets remain volatile, expect supply shortages to remain. Protectionist decisions by key producers of goods could cause sudden shocks to markets.

Labour shortages and low productivity

EU Exit, combined with COVID-19, has disrupted a stable labour situation. Food and consumer goods businesses report widespread shortages of people and difficulty recruiting for certain roles. Vacancies outnumber those who are unemployed, with staff shortages disrupting supply chains and constraining economic activity.

Economic inactivity remains a persistent issue for the UK labour market. A further 140,000 people of working age left the workforce in the period between April and June 2022.

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Overall productivity growth (i.e. output-per hour-worked) has remained persistently slow. Retail and eating out have struggled to develop efficiency. This is partly because these functions are hard to automate, but also due to changing practices (e.g. more home delivery).

There is a role for business leaders and government to help to overcome these challenges. The IGD Economics team will be focusing on these three challenges in the next few months to support better strategic planning and decision making, for the benefit of consumers, through our economic analysis and engagement with policy makers.

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