- Shoppers getting more cautious as household food spend forecast to climb £276 this year
- Risks for listed supermarkets include loss of market share to Aldi and Lidl
At almost every level of the food supply chain, costs are going up. This, combined with the loss of key products from Russia and Ukraine due to the war, has left retailers with the choice either to raise prices and lose market share, or hold fast and give up operating margins. Tesco (TSCO), J Sainsbury (SBRY) and Marks & Spencer (MKS) have largely opted for the latter.
Sainsbury’s has forecast a drop in food margins, but sees a “small volume decline [being] offset by a small price increase” in the food section, according to chief financial officer Kevin O’Byrne.
The market share competition will only get fiercer as shoppers look to protect their pennies. “The recent deterioration in market share performance is likely to be one of the reasons that both Asda and Morrisons have announced new investments in price,” said Numis analyst Damian McNeela.
The price of sunflower oil is indicative of the pressures currently faced by retailers: it shot up by 60 per cent after Russia invaded Ukraine, from £1,130 per metric tonne in February to over £1,800 in March, as fighting disrupted exports from the two countries, which together represent 55 per cent of the global supply.
The price spiral has rippled out to alternative cooking oils, which were already trading at high levels before the war. Last week, palm oil’s largest national producer, Indonesia, banned exports in a bid to keep domestic prices under control.
By the end of April, commodity benchmark prices for palm oil were at $1,850 per metric tonne, up 8 per cent on the previous week, with commodity data company Mintec writing that “market players expressed the view that prices could move up from current levels” since global vegetable oil stocks are low and demand is high.
According to retail data firm Kantar, cooking oil sales have risen by17 per cent in the year from April 2021, with sunflower oil up 27 per cent and vegetable oils up 40 per cent. Kantar’s head of retail and consumer insight, Fraser McKevitt, said there was “evidence of some stocking up as consumers prepared for limited availability along with higher prices”.
Hoping to stave off more shortages from panic buying, Tesco limited cooking oil purchases to three units per customer, while Morrisons and Waitrose allowed customers to buy two each. Meanwhile, Sainsbury’s said it would start substituting sunflower oil with alternatives such as rapeseed and vegetable oil in its products.
Iceland’s chief executive Richard Walker said on a recent BBC radio programme that the current buyingspree is “not as frenzied” as the toilet roll panic of March 2020, when sales of the bathroom product rose by 60 per cent year on year.
“But yes, we are limiting purchases and we’ve moved into smaller packs to allow existing stocks in the market to service more customers,” said Walker, whose frozen-food chain restricted cooking oil purchases to one each.
This potential panic buying episode already looks very different from the last. During the first wave of the coronavirus pandemic, supermarket shelves were being emptied faster than they could be restocked with products. March 2020 was the “biggest month of grocery sales ever”, according to Kantar, which found that consumers spent £10.8bn on groceries in only four weeks, both by making more frequent shopping trips and buying larger baskets of goods each time. Grocers saw a corresponding bounce in sales, with Tesco’s sales jumping by an estimated 30 per cent.
For the most part, the problem was not in securing the supply of essential goods, but instead with supermarkets’ ability to get products from warehouse to shelf fast enough to meet the sky-high demand.
This time around, supply and demand are both in flux, with shortages of essential cooking oil emerging at the same time that consumers are looking to mitigate rising costs of living. Unlike during the last spate of panic buying, Kantar figures show that the average shop has dropped by 4.5 per cent to £22.39 in April, with Sainsbury’s also noting declining basket size in its full-year results for the year to the beginning of March.
McNeela at Numis said this “small-but-frequent style shopping behaviour was prevalent during the last downturn as consumers, particularly at the lower end of household incomes, sought to tightly manage their budgets”.
Rather than bumper sales, supermarkets are expecting customers to trade down, and the ‘big four’ are investing to keep prices low. Competition is rising once again from discount giants Aldi and Lidl, whose combined market share has grown to over 15 per cent this year. Tesco recently warned of lower-than-expected profits over the second half of the year as the supermarket chain attempts to “keep the cost of the weekly shop in check”.
It will be difficult to keep prices low with costs of goods rising rapidly. As well as being used in cooking, sunflower oil is an important ingredient in chicken feed – Co-op chief executive Steve Murrells note that the price of the meat is rising faster than any other protein.
Numis’ McNeela expects that “price pass-through mechanisms will hold” for now, but noted that consumers “do not have infinite capacity to keep accepting price increases even for staple products where demand is relatively inelastic”.
