Kantar Worldpanel UK warns of lost sales value for UK fresh produce

minus 5 per cent sign

Kantar says produce prices at UK retail are down by 5% on average which has stripped out £570m in sales value over the last year

The UK has slipped into deflation for the first time in half a century on the back of falling oil prices, the strength of sterling, and the supermarket price war. While economists appear not to be concerned by this situation, which was finally triggered by a fall in air and sea fares, there are reasons to be cautious of this development according to Kantar Worldpanel. Produce Business UK speaks to consumer insight director Chris Cowan about why fresh produce businesses should be taking note and ensuring they truly understand their product and market

What’s the real impact of deflation on the fresh produce industry in the UK?

Chris Cowan (CC): Deflation isn’t just a produce-specific challenge – it’s a wider grocery issue. We’ve seen the major retailers leading with a price-focussed message in their advertising and heavy in-store activation across many food and non-food categories.

However, when we look at produce, the headline is pretty clear: produce prices are down on average 5% and this has stripped out £570m in the last year. Although we have seen some volume growth (3%), we’ve got to remember that 1% volume growth is simply down to population growth. At a topline level, we’re not changing our shopping behaviours as a reaction to these changes. We buy produce 104 times per year (up by one trip per year compared with last year) but a lot of value is just lost as retailers aggressively compete with each other, coupled with the added complication of the strong competition from the German discounter sector and, in particular, Aldi.

Will this loss of value cause producers to feel the squeeze so much that they fold or have to sell off areas of their business?

CC: The interesting thing about working with over 65 of the produce suppliers in the UK is that we see the different responses that clients have to the pressures faced – particularly when looking at a market suffering deflation. Although each client and each market is different, there are three broad themes that have emerged time and time again:

  1. Driving production efficiencies through investing in capital and the supply chain.
  2. Moving into new areas for margin enhancement. While there will always be a place for wholehead produce; increasingly clients are scoping out the opportunities to look at how they can diversify their risk – by going into new markets – or add to their bottom line – by going into prepared produce – and even taking it from one temperature to another (e.g. fresh to frozen).
  3. Rethinking their offer to a changing consumer. The old adage of ‘doing what you’ve always done and expecting different results’ can be apparent when we look at how to tackle shopping behaviours. Suppliers are spending more time analysing the shoppers and end consumers in ways they haven’t before – especially understanding how much value promotions add to retailers, the barriers shoppers face and also how to drive additional consumption. There’s a hunger for clients to give shoppers what they want, not what can be produced at the best cost price.

The suppliers we see in the best position are those who have the best understanding of their product, the best understanding of their shopper and the best understanding of the end consumer.

Will this drive to lower operating costs in fact just lower quality? Is there a concern that producers will be working on such tight margins that they have to 'cut corners'?

CC: Quality is paramount in produce, but price can play an important role too and it’s not necessarily a trade-off that shoppers have to face. What we’ve seen from the success of Aldi is that they have ‘won’ shoppers through their “Super 6” promotional campaign but because the quality is there, the repeat shoppers are driving Aldi’s growth going forward.

How long do you see this situation lasting? Is deflation set to stay for a certain period and how will the industry cope?

CC: First, the total produce deflation figure is skewed by what happens in the potato market, and there we saw high price increases during 2013 (driven by a shortage in supply), followed by a good season and heavy promotions in the last year. However, we do see that – particularly on the fruit side – inflation has come through in some markets.

Second, the best way to try to minimise the impact of deflation – especially if caused by promotions – is to understand the best promotional mix for your category. It’s surprising how much we see promotions hurting a category. ‘Pile ‘em high and sell them low’ isn’t the best long-term solution for suppliers or retailers.

Third, sometimes these headline-grabbing promotions can come from a very senior level within the retailers. It’s therefore important to demonstrate and quantify the lost sales value by aggressively promoting because, as one of my clients recently commented, “you can’t bank volume… you bank cash sales”.

Will this situation mean we see more imports and less British-grown produce on UK supermarket shelves?

CC: Britain has, for a long time, relied upon imported volume within produce. This isn’t something new. It’s not just the growing conditions but low fuel costs and a relatively strong exchange rate that means foreign produce will be appealing.

Instead, where there is a need is to establish why buying British produce is important. Going forward, shoppers need to see a tangible benefit of ‘buying British’ – much in the way shoppers are clear about what a Fairtrade banana means or what the Red Tractor label on meat symbolises.

View Kantar’s latest analysis on deflation in the UK grocery retail market for the 12 weeks ended March 29 here.

Chris Cowan and fellow Kantar Worldpanel consumer insight director Amir Jalaly will guide audiences at the London Produce Show and Conference 2015 through the reality of the impact of deflation upon the fresh produce business. To attend their seminar presentation ‘Working Together To Tackle Food Deflation’, register here

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