According to Euromonitor International’s latest estimates, global inflation is expected to reach 8.9% in 2022 and 6.2% in 2023. In this context, the food industry is being affected by rising costs of production, including raw materials, commodities, labour, energy, and transportation. While the COVID-19 pandemic and Russia’s invasion of Ukraine have been the major factors inflating global food prices, challenging weather conditions and export restrictions are also contributing to higher price pressure globally. Food companies need to adapt their product strategies to respond to rising costs and consumers’ reactions.
Food prices have increased across the board
Due to the strong increase in retail unit prices of fresh food and packaged food in 2022, global volume sales growth of core categories is expected to be practically flat.
Rises in agricultural input costs, such as fuel and fertilisers, are impacting animal feed and therefore prices of meat and dairy products. Snacks, in turn, include many ingredients that are experiencing sharp increases in costs, including wheat, milk, sugar and edible oils.
Categories that are heavily dependent on cereals, such as bread, pasta and breakfast cereals, have been particularly hit by Russia’s invasion of Ukraine. In the case of sweet spreads, prices of honey have been strongly affected, considering one third of Europe’s honey imports traditionally stems from Ukraine. The price of rice has also increased due to climate events such as floods and droughts.
Consumer reaction differs depending on income level, price sensitivity and brand loyalty
Consumer responses to inflation have been classified under four types:
“In need of alternatives” (low brand loyalty and high price sensitivity): Consumers are turning to more affordable options. Within butter and spreads in the UK, Arla Foods Ltd and Saputo Dairy UK Ltd are losing share to private label players such as Tesco and J Sainsbury. Poultry becomes more appealing value wise than red meat, while organic fresh produce is losing ground to standard options.
“Affluent but disengaged” (low brand loyalty and low price sensitivity): Consumers might change to competing brands or to alternative products, depending on the new price structure of the category. Olive oil for example, is still more expensive than sunflower oil, but the gap has been reduced in 2022.
“Unworried and loyal” (high brand loyalty and low price sensitivity): Some consumers are willing to continue purchasing a certain brand because they still associate it with offering high value. For example, HelloFresh continues to enjoy growth within meal kits, as it provides convenience. Those with a propensity to save may turn to stockpiling to anticipate a new price rise.
“Looking for emotional comfort” (high brand loyalty and high price sensitivity): Consumers continue to purchase their preferred brand as a token of emotional comfort or as a symbol of lifestyle they do not want to lose. Consumers are reducing shopping frequency or pack sizes or visiting discounters in search of lower prices. For instance, Oreo’s brand share continues to grow within sweet biscuits, despite inflation.
Consumers’ Response to Increases in Unit Prices are Influenced by Levels of
Income and Brand Loyalty
There are several paths that food companies can take to respond to rising costs
Companies’ strategies to respond to inflation could be classified in four basic types:
“Pass it on to the consumer”: Companies that have low competition or target high-income customers might be able to pass the higher costs on to the consumer. Certain indulgence food brands, such as restaurant chain brands in retail and those operating in gifting such as boxed assortments, are notable examples.
“Add value to validate price increases”: Food manufacturers need to add value to products to justify price increases. Convenience, health attributes, indulgence and sustainability are among the features that mid- to high-income earners might be willing to pay a higher price for.
“Do not change the product, but adapt regardless”: While some companies choose to reduce margins or rationalise the product portfolio, more enduring strategies might be to launch new brands in lower price segments or reduce other costs, such as the cost of transportation with suppliers that are closer.
“Change product components, but not the price”: To avoid an increase in unit prices, companies may reduce the packaging size (shrinkflation), or launch a new smaller format with a lower price. They can also change the type of packaging for another of lower cost, such as pouches in Latin America for margarine and condensed milk. A third option is to replace ingredients with others of lower cost, such as Walkers Snack Foods in the UK, which has replaced sunflower oil with refined rapeseed oil in its potato crisps/chips.
Strategies in Response to Inflation: Opportunities for Companies
The food industry will need to keep adapting product strategies to inflation in the short term
Although global inflation is expected to moderate in 2023 compared to 2022, there are risk factors that could keep costs (and prices) high, including the prolongation of the war in Ukraine, extreme weather conditions, or new COVID-19 variants, which could increase supply chain challenges and cause stock shortages of raw materials and products.
Consumers will continue to seek better value from their food products, while companies should, in this context, consider reviewing recipes and/or marketing mix to absorb some of their higher costs.
Additional information on this topic can be found in the report Inflation Surge in Packaged and Fresh Food.