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Inflation Surge: Packaged and Fresh Food

November 2022

The sharp increase in prices of food in 2022 is directly linked to rises in costs of commodities, labour, energy and transportation. Consumers are reacting to inflation according to their income level, price sensitivity and brand loyalty. Responses include changing to private label or cheaper brands, and buying at discounters. Companies are responding to rising costs by cutting margins, reducing pack sizes, replacing ingredients and launching new brands at lower price points.

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This report comes in PPT.

Key Findings

Rising costs of raw materials, labour, energy and transportation force an increase in prices of food

The strong increase in prices of packaged food and fresh food is directly linked to a rise in costs of production, including raw materials, commodities, labour, energy and transportation. While the pandemic and Russia’s invasion of Ukraine have been the major factors inflating global food prices, bad weather conditions and export restrictions are also contributing to higher price pressure globally, particularly affecting the Middle East and Africa, and Eastern Europe.

Consumers’ response to inflation varies depending on income level, price sensitivity and brand loyalty

Consumers reactions to inflation differ depending on income level, price sensitivity and brand loyalty. The responses of those more affected include changing to private label or cheaper brands, looking for discounts or buying in discounters. Other consumers prefer to stick to their preferred brands, but are diminishing the frequency or the pack size of their purchases.

Companies adapt to the inflationary environment in their product and pricing strategies

The paths taken by companies to respond to rising cost include absorbing higher costs and lowering margins, reducing pack sizes (typical in snacks), changing the type of packaging (such as stand-up pouches in dairy), replacing the ingredients (such as sunflower oil in potato crisps/chips), rationalising SKUs and launching new brands at lower price points (frequent in dairy). Those that can pass higher costs onto consumers are typically in premium segments, or otherwise must add value to the offering to persuade consumers to pay a higher price.

Inflation is expected to fall in 2023, although there are risk factors for keeping costs high

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 between Russia and Ukraine, extreme weather conditions, or new COVID-19 variants, which could increase supply chain problems and cause stock shortages of raw materials and products. Edible oils and bread are among the categories with high risks.

Key findings
Global growth outlook continues to worsen amid rising recession risks
Persistent and broadening inflation significantly reduces consumer spending power
Real GDP annual growth forecasts and revisions from last quarter
The many layers of global inflation
Industry impact: Rising commodity, labour and logistics costs
Deconstructing inflation drivers for the food industry
Company impact: Price increases, target revisions and reformulations
National protectionism drives up commodity prices further
Fresh food: Growth in cost of commodities, fertilisers, labour and logistics affects prices
Staples: Categories heavily dependent on cereals are particularly hit by the war
Category focus: Bread across the world
Dairy products: Costs of fuel, fertilisers and feed affect prices of milk, yoghurt and cheese
Snacks: High increase in ingredient costs leads manufacturers to adjust recipes
Category focus: Tablets in the US
Cooking ingredients and meals: Edible oils and table sauces particularly affected
Category focus: Edible oils in the world
Food product positioning: Organic claims victims of dwindling consumer confidence
Consumer response depend on income, brand loyalty and perceived value
Consumers shifting towards private label
Opportunities for food players include new recipes and/or new pricing strategies
Latin America, the region with the highest rate of inflation in 2022, illustrates global trends
Conclusion: Final considerations

Fresh Food

Fresh Food refers only to fresh uncooked and unprocessed foods (packaged and unpackaged). Packaged sugar products and natural sweeteners (e.g. brown sugar, table sugar, molasses) are also included. For Fresh Food, we research total sales across distribution channels including retail, foodservice and institutions. For a selected 18 markets, we have a breakdown of total fresh food sales according to the following formats: • Retail • Foodservice sales • Institutional sales Retail Retail sales is defined as sales through all legal establishments primarily engaged in the sale of fresh, packaged and prepared foods for home preparation and consumption. Retail sales excludes sales to hotels, restaurants, cafés, duty free sales and institutional sales (canteens, prisons/jails, hospitals, army, etc). Our retail definition excludes the purchase of food products from foodservice outlets for consumption off-premises, eg grilled chicken/meat/fish bought from counters of cafés/bars. This falls under foodservice sales. For foodservice, we capture all sales to foodservice outlets, regardless of whether the products are eventually consumed on-premise or off-premise. We estimate sales through the following channels: Modern Grocery Retailers • Supermarkets • Hypermarkets • Discounters • Convenience stores • Forecourt retailers Traditional Grocery Retailers • Independent small grocers • Food/Drink/Tobacco Specialists • Other grocery retailers (morning/speciality/open/wet/farmers’ markets, stalls and kiosks, etc) Non-grocery retailers • Health and beauty specialist retailers • Other non-grocery retailers Non-store retailers • Homeshopping • Internet retailing • Vending • Direct selling Foodservice Foodservice sales are defined as sales TO consumer foodservice outlets that serve the general public in a non-captive environment. In other words, this means that the foodservice volumes track sales of all fresh food going into restaurant kitchens, regardless of what the restaurant actually does with that food. Foodservice outlets include cafés/bars, FSR (full-service restaurants), fast food, 100% home delivery/takeaway, self-service cafeterias and street stalls/kiosks. Sales to semi-captive foodservice outlets are also included. This describes outlets located in leisure, travel and retail environments. • Retail refers to foodservice units located in retail outlets such as department stores, shopping malls, shopping centres, super/hypermarkets etc. • Leisure refers to foodservice units located in leisure establishments such as museums, health clubs, cinemas, theatres, theme parks and sports stadiums. • Travel refers to foodservice units based in airports, rail stations, coach stations, motorway service stations offering gas facilities etc. Institutional sales Institutional sales is defined as sales to captive foodservice units that serve captive populations such as in hospitals, schools, prisons, military camps, hotels, hostels, nursing homes, homes for elderly people, religious houses, etc.

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