The retail price of food and drink is rising sharply. And that seems likely to continue. According to our researchers, the average European consumer pays an extra 243 euros for the same basket of food products compared to 2021. This increase is in addition to the general increase in the cost of living (fuel, electricity, rent, eating out, etc.). Governments will have to provide extra support for the most vulnerable households.

Prices for agricultural products rose by +31% in 2021 and will increase by a further +23% in 2022. European consumers only felt a small pinch in their wallets in 2021 because prices increased significantly in the second half of last year. The Russian invasion had yet to take place. With agricultural prices expected to rise a further +22.9% this year, European consumers should brace themselves for an unprecedented rise in retail food prices.

Unsurprisingly, producer prices have risen most in the categories where Russia and Ukraine have large shares in international production, such as oils and fats (+53%), flour (+28%) and pasta (+19%). In certain product categories, the disruption was so strong that shortages emerged (such as sunflower oil) and contributed to the increase in the price of substitutes (olive oil).

It is not for nothing that the subject of food security was so high on the agenda of the G7 (the group of seven leading industrialized countries), which met in Germany in mid-May. Foreign ministers warned of global food shortages that threaten if Ukraine is unable to export grain.

The question is how much and how quickly the retail sector can pass on price increases. It is a sensitive process where consumers easily switch to cheaper competitors. The current circumstances are also very changeable. Prices fluctuate continuously. Retailers must strike the right balance to maintain both minimum sales and profitability. Our researchers estimate that retail food prices will increase by more than +10% by 2022. According to World Bank forecasts, retail food prices will stabilize or begin to decline in early 2023.

To survive periods of high inflation, retailers must carefully manage their price mix. A typical strategy among retailers is to sacrifice profit margins by setting low prices for high-demand goods in order to retain customers. Compared to previous periods of high inflation, we expect retailers to pass on more of the price increase to consumers this time around. There are 3 reasons for this:

  1. First, the incentive for retailers to maintain sales volumes at the expense of lower prices seems less strong than in the past. Food retailers have had two years of tough operational challenges, but those years turned out to be very favourable (in terms of both turnover and profit). Food retail sales were still +10% above 2019 levels in the first quarter of 2022, and profits have been exceptionally high for more than two years.
  2. Second, most food retailers are more value-driven than in the past. Among other things, they developed a wide range of innovative services to increase customer loyalty (collection or delivery services, self-checkout, special mobile applications, etc.) in order to escape price-driven competition. The low-cost segment is left to discount chains. A return to highly aggressive pricing behaviour seems unlikely as it would jeopardize years of efforts.
  3. Third, investments in technology have significantly helped retailers adopt dynamic pricing strategies. The increasing use of analytics in the industry is helping retail chains refine their pricing strategies, not just at the corporate level but also on the in-store or even personal level.
European households spend 12% to 25% of their final consumption expenditure on food and beverages. The lower the income, the higher this share. The sharp price increases for food and drink can cause problems for large groups with lower incomes.

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