Grocery prices have fallen by 0.6% since July, according to the first results of The Grocer Price Index. And analysts say our new research supports widespread industry concerns about the way in which deflation is hitting the long-term profitability of some parts of the supplier base.
The Grocer Price Index is based on the prices of 100 grocery items stocked by the big four retailers - Tesco, Asda, Sainsbury and Morrisons/Safeway. Our basket has been developed using up-to-date consumer research to reflect the typical shopping habits of consumers and contains a wide range of key brands and own label products from across all grocery categories including ambient grocery, chilled foods, frozen, dairy, meat, fish and poultry, and fruit and veg.
Retail and trade research specialist ESA collects the pricing data via in-store audits and then produces an industry average basket price allowing us to monitor how prices are changing across the industry.
The initial results of The Grocer Price Index can be attributed to a number of factors, says Investec’s food manufacturing analyst Nicola Mallard, with the impact of the integration of Safeway by Morrisons chief among them.
With Morrisons continuing to harmonise range and price, she says, its competitors have all had to address their own pricing issues in response. She adds: “The grocery industry has always been competitive on price and consolidation is likely to be bad news for some suppliers. On top of the obvious price cuts at Safeway, there will also have been a ripple effect throughout the other retailers.”
Seasonality and promotional activity have also impacted The GPI.
And while the supermarkets will be able to claim that a 0.6% fall in retail prices is great news for consumers, analysts say the people for whom alarm bells continue to ring are manufacturers and suppliers.
David Hallam, food and drink industry analyst at Williams de Broë, says: “Whatever deflation there is within retail, the likelihood is that it will be even greater for the manufacturer. Indeed, deflation for chilled manufacturers is currently around 2%.”
As one of the country’s leading grocery suppliers, Unilever UK Foods says that deflation is one of the most serious issues facing the food and drink industry.
Customer management director Tony Smith explains: “Price promotion can be an effective means of driving product trial and building sales of impulse lines over the short term, but in the longer term it’s important that brands add value in their own right and are not over-reliant on manufacturer-funded price mechanics for volume growth.
“Extensive long-term price promotion on core categories adds to deflationary pressure on the industry and will result in reduced levels of product innovation, ultimately limiting consumer choice.”
Smith says that, faced with this deflationary market, retailers and suppliers both need to focus their efforts on adding value to the grocery shopping experience by working together to introduce innovation for consumers. The bad news, says Hallam at Williams de Broë, is that there is no evidence the market will break out of its deflationary cycle in the near future.
As The GPI shows, the actual average cost of our basket of 100 commonly bought products has fallen dramatically since we started tracking prices - aside from a small rise from July to August.
Indeed, between July and November the fall was a staggering 1.3%. So we would have recorded even greater deflation over the six month period had prices not rebounded earlier this month on the back of seasonal changes in the cost of products in areas such as fresh produce. For example, the average selling price of the grapes we are tracking shot up by 32% between November and December.
But as our graphic above illustrates all too clearly, the general trend of The GPI has been downwards in the six months we have reviewed as part of this new initiative.
And as we enter arguably one of the most critical Christmas trading periods for years, it’s that deflationary trend that will be worrying suppliers most.