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Rabobank: Inflation in Europe leading consumers to choose private label

Produce Business wire reports

With food prices soaring across the globe, in Europe consumers and food retailers are opting for private label products.

According to an article by Rabobank, in Europe, supermarket prices have risen by 7 to 9 percent so far in May and the end is not yet in sight. Given the impact of the current inflation on consumers’ wallets, private labels look to be gaining market share.

Food inflation has been steadily accumulating since January at about 1 to 1.5 percentage point a month. The impact of the war in Ukraine on agri commodities and energy prices has pushed the already historically high cost levels for many food producers even higher. 

Food retailers have also been driven by (perceived) scarcity and the subsequent fear of missing out to accept higher prices. Therefore, consumers will need to brace for further price increases in the coming months, given the rising prices for grains, oilseeds, energy, transport, and packaging seen since the end of February.

In addition, supply contracts that will need to be renewed, the latest producer price indices (PPI) in some European countries, and the large divergence of consumer price inflation rates between different categories are far from signs of hope.

Furthermore, with overall inflation rates in Europe at about the same level as current food price inflation and salary increases not keeping pace, consumers are seeing an erosion of their spending power. 

Despite higher prices, consumers’ food budgets are not predicted to automatically increase. On the contrary, they are expected to try to circumvent inflation by trading down to cheaper products or cheaper channels.

Private labels are forecast to gain traction. Although in mature private label markets such as the United Kingdom, Germany and Switzerland, private label market shares came under pressure during the economic recessions of 2008/09 and 2011/12, the same is not expected to happen again. 

Instead, private label markets could follow the patterns of countries like Spain, Greece, and Ireland, where recessions took a bite out of consumers’ disposable income. As they looked for lower ‘absolute’ prices, private label market share and hard discount penetration benefitted. 

Whilst officially Europe is not in a recession at the moment, the current inflation appears to be having a material impact on disposable incomes throughout the continent, and consumers are likely to focus on absolute prices.

Food retailers are placing more emphasis on their private label assortment, and consumers are buying more supermarket brands, so the top-line outlook for private label companies looks promising. Their bottom line will depend on their negotiation power, as their cost base  is generally more vulnerable to cost inflation than that of their branded competitors.

In conclusion, the expected focus on absolute rather than perceived low prices in the more mature private label markets are projected to be different than in earlier recessions. For brand producers, the absolute difference between list prices and promotional prices is likely to gain more attention, as will offering value propositions.



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