The fundamentals of food price inflation have been sorely tested by coronavirus. The price of oil – the most important commodity to the food industry – has fallen significantly, while food-based commodity prices have remained relatively stable, despite early fears. At the same time, extraordinary demand in the take-home channel has given supermarkets a licence to reduce promotion levels in order not to jeopardise supply (while taking a £750m business rates holiday). And the fact that promos continue to run at a lower rate, despite supply returning to normal, underlines that this is a seller’s market, with the vast number of staycationers and the heatwave providing further optimal conditions for grocery, broadly speaking, to flourish.
But make no mistake. If the supermarkets have been able to set their own agenda on price, it won’t be for long. Tesco and Sainsbury’s insist the lack of promotions is due to a focus on EDLP, but suppliers have already sucked up extra costs. And with further costs in the pipeline, there will likely be plenty of supermarket-supplier showdowns to come.
Brexit is the catalyst. While the government’s last-minute £200m investment in the so-called Trader Support Service has been welcomed as a solution to the Northern Ireland border, it’s a drop in the ocean versus the extra costs of Brexit. Customs bills alone are expected to cost £7bn each year – about a third of the £350m we supposedly send to the EU each week – with tariffs, reduced access to cheap European labour and increased transport costs also needing to be factored in.
It’s therefore very concerning that with less than five months to go there are still so few discussions between retailers and suppliers on how the burden of customs and tariffs will be shared – subsumed, no doubt, by Covid-19.
But price hikes are the harsh reality of leaving the EU. Supermarkets may be loath to place the burden on shoppers, and perhaps they are building up a war chest to mitigate these extra costs. But in the midst of a recession, supermarkets will have to suck those costs up. Whether they pass them on is up to them.