Days of cheap food are over, say suppliers as ingredient costs soar


Superstore groups prepare to stomach higher prices because of far east demand and biofuel incentives

Simon Bowers
Wednesday September 5, 2007
The Guardian

Supermarket pledges to drive down the price of staple goods and help cash-strapped shoppers looked increasingly vulnerable last night after Britain's biggest food manufacturer insisted even the largest superstore groups would have to stomach higher prices from suppliers that are struggling with steep rises in ingredient costs.

Premier Foods, the group behind Branston Pickle, Oxo, Mr Kipling and Quorn, said a "systemic change" in world ingredient markets, with "violent rises" in many commodities, had heralded a new era, bringing to a close almost 15 years of relatively stable, low inflation.

Finance director Paul Thomas predicted general food ingredient inflation could reach "somewhere as high as 4% to 5%" next year.

Chief executive Robert Schofield said: "Over the past 30 years the cost of food as a proportion of disposable income has come down from 30% to less than 10%. It is going to edge back up ... I think we've got two or three years of inflation at the very least."

Of central concern to Premier, which acquired Hovis bread maker RHM earlier this year, has been a doubling in the price of wheat. The group pushed through price rises across its bread and flour range earlier this month and yesterday warned that more price rises were being planned unless wheat prices retreated. Every £10 rise on the price of a tonne of wheat costs Premier £8m a year.

Yesterday Tesco added 8p to the price of an 800g Hovis loaf and analysts predicted a further rise of 5p to 6p.

Six weeks ago family-owned competitor Warburtons filed figures with Companies House showing a £14m increase in its raw material bill. It saw profits dip despite a 16% rise in sales.

Bread is among the basket of staple goods at the centre of the latest price war between the supermarkets, led by Tesco and Asda. In June these two launched price cuts totalling £520m and promised the move represented just the "first salvo" in a longer battle. The supermarkets are focused on attracting shoppers whose disposable income has been hit by five interest rate rises within a year, volatile energy bills and only modest pay rises.

Last night Tesco issued an uncharacteristically conciliatory statement. "Where there are genuine cost price pressures in the supply chain we are always open to discussion with suppliers. We will continue to do all we can to keep prices as low as possible for shoppers but when wholesale costs go up some prices in store may follow to reflect that."

The carefully worded comment comes after the Competition Commission, which is coming to the end of an investigation into the dominance of supermarkets, last month ordered Asda and Tesco to hand over millions of emails exchanged with their suppliers. Some suppliers have privately accused supermarkets of bullying them on price.

In a robust message to the big retailers, Mr Schofield said: "I have no intention of taking a hit on margin ... Imagine what would happen if you've got 20% or 25% inflationary pressure on your business and you don't put your prices up. These are numbers that put you out of business if you don't do that."

At the same time Premier said it was looking at cutting costs on bread. This is expected to include bakery closures and a review of distribution. Mr Schofield said it should not cost more to deliver bread than it does to make it, suggesting a collaborative solution with leading competitors Warburtons and Associated British Foods, makers of Kingsmill. "Currently you have three vans delivering to each store within an hour of each other each day. That's highly inefficient."

Speaking after Premier announced half-year underlying operating profit at its bread business had halved to £19m, he also pledged to raise marketing spending behind Hovis, bringing it in line with other leading Premier brands and responding to competitor campaigns. Premier said demand from India and China and incentives for farmers to grow biofuels had increased wheat and other commodity prices.

The company said the recent abnormal weather patters and impact of global warming was not, as yet, a discernible factor. "There have been poor harvests - but we've had poor harvests before and you'd have to get an awful lot of them before you could say something has fundamentally changed," Mr Schofield said.

Demand from the far east and the trend toward biofuels were driving up carbohydrates around the world. "We can't see, from where we are sitting, that these sorts of pressure are going to go away, so this is not a blip ... If you're buying pasta in Italy it has gone up 25%; if you're buying tortillas in Mexico it's gone up; if you're buying bread in the UK and Europe it has gone up." There was a knock-on impact on livestock, milk and glucose prices, he added.

In recent weeks the National Farmers' Union and the National Pig Association have accused supermarkets of pursuing unrealistic prices on meat in the face of soaring feed costs. Last month Asda launched its £2 chicken - a measure described by NFU president Peter Kendall as "clearly unsustainable and [sending] completely the wrong message."

Other recent ingredient price rises include a jump in cocoa, palm oil and milk. Firms to have been hit include Northern Foods, Greggs and Cadbury Schweppes.