In trying to discover what lies in store following Brexit, what can the fresh produce industry glean from recent economic history? What are the implications of Brexit for the wider grocery sector? Chris Cowan, consumer insight director from global specialist in consumer behaviour Kantar Worldpanel UK, gives his insight on what the future might hold
To describe the decision of the British public to embrace Brexit on that momentous day in June as the defining political act of this generation seems something of an understatement. Everything changed in the early hours of June 24; that much is clear. However, detailing in what way – or, indeed, ways – is tougher to explain.
And with talk of the UK slipping back into recession standing at 50/50 according to the National Institute of Economic and Social Research, Cowan has examined whether there are any lessons to be learned from the recession that occurred in the wake of the global credit crunch of 2007-08.
Historical perspective
Cowan states that while the prevailing post-Brexit scenario and that of 2008-09 are not identical, the historical perspective is better than speculation. He concludes that the grocery price inflation that occurred as the result of the 2008-09 recession was due to:
* Weaker Sterling
* Commodity prices fluctuating
* Oil prices going up
He believes that we’re only seeing a weakening of the pound rather than the other two factors.
And what of the rise of the discounters – namely Aldi and Lidl? There was a noticeable rise of the discounters following the economic downturn of the late 2000s. But were the two linked? Cowan suggests that this surge was not attributable to the recession. He says much of the growth at this time was due to better store environments and a better range.
So, what happened last time, and why?
* Commodity price surge
There were fears about global food shortages allied with seeming never-ending increasing demand from a middle class in China (with the assumption that India might follow suit).
The commodity futures markets went beyond any fundamentals and the quoted price of wheat, rice and cereals soared (doubling in some cases).
*These raw commodity prices rises filtered through into the UK market causing grocery inflation that peaked at 9%.
Consumers started to manage their spend during this period. They tended to buy cheaper alternatives or used promotions more effectively and there is some evidence to suggest less food was wasted (leading to a marginal decline in grocery volumes).
However there was no surge towards own-label. Branded goods reacted by promoting more to protect their share. There was a big shift in mechanic to temporary price reductions (TPRs) from multi-buys to help reduce till shock as prices were rising.
The impact of lower sterling
So what is the potential impact of lower sterling? Cowan notes that while Kantar is not in the business of economic forecasts, history suggests that the cost of imported goods will rise and have a corresponding effect on inflation. And what are the possible consequences of this? “Historically we have seen consumer’s respond to higher prices by trading down to cheaper products including own label,” says Cowan. “We also saw brands responding by increasing promotional levels. It’s important to remember that the market structure today is different from 2008, where we have seen a longer term shift towards increased focus on price and shifting promotional focus more recently from multi-buy to TPR.”
The impact on the economy is another factor to take into account when looking at what lies in store for the fresh produce industry. The combination of inflation and recession could spell doom for many, but Cowan believes that in the short term at least it’s still ‘business as usual’ for most. There is a caveat though. The unquestionable depreciation of sterling means that most industries are mired in a constant state of flux – the food sectors are no different. Continued depreciation will lead to a rise in imported goods and further increases in inflation.
In the medium term, many firms’ investment decisions will be deferred and delayed. The economy will slow down with uncertainty and Cowan expects labour market gains to be slowly reversed. The Bank of England, which on August 4 took the unprecedented decision to cut interest rates to a historic low of 0.25% in an attempt to mitigate the impact of Brexit, will face the conflicting pressures of stimulating the economy and managing inflation. Finally, and most pressing for consumers, households will feel the squeeze with rising prices, and this will be compounded by stagnant wages.
Category effect
Short to medium term – Import tariffs from the EU
Cowan points out that some categories are clearly more reliant on EU imports than others, and without knowing the outcome of negotiations it’s hard to predict how onerous these will be on groceries. However, it’s clear that some products – notably fresh fruit and vegetables, wine and Continental cheeses. could cost a lot more to supply into Great Britain.
“A lot depends on where we might be able to source an alternative here,” warns Cowan, “For example, we might just drink more New World wine – but Parmesan is a lot harder to substitute.”
Could this, then, provide an opportunity for local produce? Cowan certainly thinks so. “This could also drive higher consumption of local produce,” he says. “Possibly on price, however, rather than on provenance and/or sustainability grounds. Could this even herald a move to more seasonal eating? In practice I would question whether consumers are really likely to change their eating habits drastically unless inflation on categories is truly prohibitive.”
Price increase
Price increases are also worth taking into account. Cowan suggests in the short term we may see price increases in fruit and vegetables. And then foods made from basic commodities with a dampened, delayed effect from processed foods where imported ingredients form a lower proportion of the cost price. There could be subtle shifts in fruit and vegetable purchases towards more competitively priced local produce. “Increases in pasta, rice, cereals and wheat based product prices will have little impact – these are difficult to substitute and form a low proportion of any meal occasion,” he says. “Imported meat inflation may lead to some switching to cheaper proteins.”
In the medium term if purchasing power diminishes, consumers will be under more pressure to find savings. This generally leads to purchasers choosing cheaper products, changing stores or buying more promotional goods – consumers, Cowan states, rarely change their overall volume of goods bought. “However, previous evidence suggests there will be only minor changes to brand shares,” says Cowan. “Consumers could save 15% overnight by switching from brands to own label – they don’t and won’t. They like their choices and stick with them.”
There are other things to consider according to Cowan. With exchange rates unfavourable more families may decide to holiday in the UK. Cowan wonders whether this could prove a boost to markets such as ice cream.
What happens to fuel prices will also affect behaviour. Rising prices could affect shoppers’ willingness to drive to buy their groceries (and so could lead to smaller baskets and shopping around. “In the short term the fall of the pound has been offset by a corresponding drop in the price of crude oil, so the impact will initially be limited,” he concludes.
