Food prices will likely stay higher for longer as costs are passed on
Food price inflation has passed its peak, but the upcoming hike in the national living wage (NLW) means food price rises will stay higher for longer. So how hard will rising labour costs hit the industry, and who is worst affected?
April’s 9.8% hike in the NLW to £11.44 from £10.42, announced by Chancellor Jeremy Hunt in November, follows a similar 9.7% rise in 2023 from £9.50. And no matter how foreseeable, this 20.4% rise over two years will be hard for many retailers and suppliers to swallow, Most affected will be those parts of the food chain with labour-heavy cost bases. Greencore, which prepares its sandwiches by hand, told The Grocer in November that the NLW rise would add £30m to its wage bill and would “have to be mitigated”. It reiterated this in January, warning the rise would “seep into price rises”.
Similarly, Associated British Foods CFO Eoin Tonge noted last month: “Labour inflation is going to keep inflation higher. You can’t get away from that.”
In addition to the NLW hike Shore Capital analyst Clive Black also points to a 7% hike in business rates that will kick in alongside the NLW hike that “represents material inflationary pressures instituted by the UK government that is going to hit the whole British food system from horticulture to hospitality”.
The biggest employers are the supermarkets. An indication of the impact of 2023’s 9.8% increase in the NLW comes from Retail Economics. Of a 4.3% year-on-year increase in operating costs for retailers in quarter three of 2023, 3.4 percentage points were rising labour costs, according to the consultancy’s Retail Cost Base Index.
Entry-level rates on the rise
That will partly be because any rise in the NLW has a “ripple effect right the way across the wage structure”, says Retail Economics CEO Richard Lim. “Pay differentials need to be maintained, for shopfloor workers to team leaders to store managers and area managers”.
The same dynamic drives up entry-level rates of supermarkets paying comfortably above the NLW, such as Lidl and Aldi.
However, the ripple effect up the wage structure is thought to be a slight advantage to discounters compared with traditional peers, as their operating model features fewer pay grades where the impact can be felt.
|Starting hourly pay nationally
|Starting hourly pay inside M25
|£11.75 (plus location allowance)
Source: Respective retailers. *Effective from March 2024
They also employ fewer people per sale, notes Lim.
While full-scale supermarkets will therefore be at a further disadvantage, those most exposed will be smaller retailers, particularly if they’re paying the statutory minimum, as they will likely have less flexibility to absorb the costs, adds Lim.
Chris Edwards Sr, chairman of variety discounter One Beyond, which has 115 stores, says “an increase in the NLW of the magnitude we’re going to see in April can have a significant knock-on impact across the company. We’re still confident about the business, but the actual net profitability, we’re analysing it, to see where we’re going with it all. In a nutshell, I’m not as confident as I was a few months ago.
Across the sector, employee benefits may be in the firing line as retailers seek to offset the additional cost, just as many have already ditched paid breaks, says one industry source. “It could be staff discounts, or it could mean less generous holiday benefits.”
This search for operational efficiencies is long-standing, with Interpath director Thomas Swiers pointing to companies exploring shift patterns, production automation or outsourcing/in-sourcing manufacturing.
“One saving grace of this rise is how well publicised it has been, so there is an opportunity for producers to use this to contextualise pricing conversations,” he says.
Indeed, Premier Foods boss Alex Whitehouse said the NLW hike was in line with its own forecasts and was already built into its plans, while noting the industry could benefit from consumers “starting to feel a little better off”.
Pool of workers diminished
But some sub-sectors of the food supply chain have been under intense labour pressure for many years, particularly as the pool of flexible and affordable European workers has been turned off after Brexit.
Ged Futter, founder of The Retail Mind, notes: “If you are a soft fruit grower where wages are 51% of your cost, or asparagus where it’s 71%, what are you supposed to do? That has to go through to your pricing otherwise you will go bust.
“Growers and farmers are particularly at risk and one of the worst affected sectors… A lot of them having been losing money for the past couple of years and are leaving the industry.”
This, he says, could have a significant affect on UK plc and the country’s food security as the food chain will inevitably become more reliant on imports at a time where exporting to the UK has become cumbersome for European suppliers.
The flipside of increased labour costs is that wage increases are clearly vital in terms of maintaining consumer living standards, particularly among low-paid workers, particularly in the context of the cost of living crisis and long period of rocketing inflation outstripping that wage growth.
“In theory, if everybody’s getting paid 10% more, they’ve got more money in their pocket – but it’s whether that reflects on shop takings,” says Chris Edwards Snr, chairman of variety discounter One Beyond.
So it is understandable and right the government wants to close that gap – something Greencore CEO Dalton Phillips is “hugely supportive” of despite the hit to its own wage bill.
Either way, food price inflation remains stubbornly sticky – edging down to 6.8% in January from 6.9% in December, according to Kantar, as the drop in inflation in late 2023 has dramatically eased.
Another spike in the cost base will likely ensure food inflation remains with us until the next general election and beyond – and that will have impacts across the economy in terms of macro-inflation and the likelihood of interest rates being able to be cut.
As Shore Capital’s Black says: “The food system cannot absorb such material state-induced inflation and so food inflation can be expected to be sustained well into 2025.”