Recent years have seen a ubiquitous surge in inflation and rising prices. Consumers wrestle with higher housing prices, energy bills and costs of daily necessities such as groceries. The spike in grocery prices is a direct effect of rising cost levels throughout the F&B value chain. Costs are being driven up by increasing energy prices and labor costs (partly due to labor shortages and partly from inflationary pressure on wages), and because of logistical issues and misalignments between (regional) supply and demand. Roland Berger and PRIME Retail & Trade Solutions have conducted a joint assessment to better understand how product prices have developed across the value chain and how this development influences F&B dynamics, specifically in the Netherlands in the first half of 2022.
"Grocery retailers need to set out clear strategies to effectively deal with the cost and price challenges; a well-defined commercial strategy is key."
To maintain margins, F&B manufacturers are looking for ways to pass on higher costs down the chain, while grocery retailers - in an ongoing battle for market share - have an interest in minimizing price increases for consumers. The pressure in the F&B value chain is leading to fierce negotiations between manufacturers and retailers. In some cases, this has led to empty shelves. The stakes are high on both sides of the bargaining table. Both F&B manufacturers and food retailers are fighting a fundamental battle to maintain EBITDA margins, and in the case of food retailers, also to secure market share in a highly competitive retail environment.
Large F&B manufacturers have been relatively successful in passing their costs down the value chain and maintaining gross margins (profitability) at their long-term averages. Taking a selection of large global premium brand manufacturers and their public data on price and volume effects of revenue growth, it is clear that price-driven growth is at an all-time high. In 2020, price increases accounted for approximately 1% of year-on-year annual revenue growth, but the first two quarters of 2022 show a completely different picture: revenue grows at about 9% (7% price effect) and 11% (10% price effect), Q1 and Q2 respectively. F&B manufacturers have been effective at negotiating product price increases to cover their increasing input costs. The market is also confident that F&B manufacturers can maintain long-term profitability.
How grocery retailers have dealt with rising cost levels can be seen in the development of product prices. This assessment distinguishes between i) price development of grocery products in general and across retailers, ii) price development of products offered by grocery retailers versus instant delivery players, and iii) price development of grocery products in different assortment categories.
For grocery retailers, economies of scale (purchasing power) will gain importance and likely lead to further consolidation of the grocery market in the mid to long term. A comprehensive commercial strategy, which addresses how to effectively utilize (competitor) pricing data to make “smart” pricing decisions, will be a critical success factor in the market going forward.
Roland Berger and PRIME Retail & Trade Solutions have conducted a joint assessment to better understand how product prices have developed across the value chain and how this development influences F&B dynamics.
