Retailers, Consumers Wary of Changing Food Costs

NEW YORK—As higher commodity prices become “the norm” rather than a temporary peak, there may be a greater impact on consumer behavior and retailer and supplier strategies than has been apparent so far, according to a new report, “Food and Beverage 2012—a taste of things to come,” from Deloitte Touche Tohmatsu. While current food commodity prices may come down from their current peaks, the increases already seen in the real cost of food represent a permanent step change. With consumers also being impacted by higher energy costs, economic uncertainty and a reduction in the availability of cheap credit, the effect could be significant.

Beginning in 2005, and for the first time since the 1970s, food prices have been increasing substantially. As a result, since 2000, the prices of maize and rice have doubled while the price of wheat has tripled. In 2007 alone, wheat prices rose 52 percent while the Food and Agriculture Organization of the United Nations reports that its global food price index rose 40 percent compared to only 9 percent in 2006.

These increases in the costs of basic commodities and increasing nervousness about security of food supply are likely to have profound effects on consumer behavior, on retailer strategy, and on the responses of suppliers and primary producers.

Bruce Westbrook, Deloitte’s consumer products consulting leader in the United States, said: “We are already seeing signs of higher food prices leading to a shift in purchasing patterns towards lower-priced private label and discount products and shopping at low-priced retailers. It could also result in a shift away from eating meals in restaurants and bars—as was the case in the last economic downturn. In poorer countries, where governments are less able to afford food price subsidies, the increases in food prices are far more serious and have resulted in violent protests in parts of Asia, Latin America and Africa.”

According to Deloitte, Retailers operating in price competitive markets such as the United States and the United Kingdom face the dilemma of to what extent they absorb these increased costs. Westbrook said: “In recent years, price increases by retailers have required real product differentiation, strong brand equity, innovative products or services and a superior customer experience.”

Rising prices also present growth opportunities for food retailers. “Consumers switching from eating out to shopping for food for home should protect growth. Price inflation also presents retailers with an opportunity to protect and enhance margins as consumers become more accepting of price increases,” said Pat Conroy, vice chairman and Deloitte’s U.S. consumer products leader.

In the longer term, global food price stability should return, although there is a big “if” in this scenario. Conroy noted: “If market forces are permitted to function, food production will expand, land efficiency will increase, and prices will ultimately come back down. However, agriculture is one of the last bastions of intense government involvement in the market. Therefore, retailers and suppliers must prepare for various scenarios, including the worst with continued increases in commodity prices and slowing consumer spending. They must exhibit flexibility, minimize costs, maintain multiple supply chain choices and clearly differentiate from competitors.”

“Food and Beverage 2012” is the result of over 90 interviews with board-level executives at manufacturers, retailers and food service companies from around the world as well as a survey of over 1,000 consumers. The report looks at seven key strategy and execution issues identified by the survey respondents: Health, nutrition, and corporate accountability; tougher regulation; greenhouse gas emissions and the carbon footprint; food miles versus sustainable development; manufacturing strategies: outsourcing and private label; the role of private equity; and increasing commodity prices and new supply-chain models.

A copy of the report is available online.