Expert Guides
āSupermarket prices rise at fastest rate for four yearsā (Grocer magazine 12.08.17)
Since the UKās referendum vote to leave the EU in June 2017, increasing food prices have been a constant challenge for contract caterers and their clients. As this situation looks set to continue, bartlett mitchellās operations and procurement team have produced this Food Inflation expert guide. The guide outlines the issues, influencing factors and ways we can all work together to mitigate the lack of stability in food pricing.
FPI, CPI and RPI
The rate of increase in prices for food are tracked on three indices;
- Foodservice Price Index (FPI)
- Consumer Price Index (CPI)
- Retail Price index (RPI)
The FPI is the independently developed alternative to the CPI and RPI. It contains data drawn from over 50% of the foodservice market and around 7.8m transactions per month. It is the only inflation report focused on the Hospitality and Leisure sector. The FPI provides a more accurate and relevant figure to the foodservice industry than the government’s CPI.
The CPI is similar to the RPI but does not include the costs of housing. Therefore, the CPI is more aligned to the FPI in terms of the products it is measuring.
The RPI is a list of prices of goods and services that show how much prices have changed in a given period of time. This index includes the costs of housing (rents, mortgage interest costs and council tax for example).
The FPI latest data reports food inflation is currently tracking at 9.3% (August 17 data) the CPI is tracking at 2.9% and the RPI is at 3.9%. The discrepancy between the indices shows that the foodservice industry is more exposed to inflationary pressures than consumer-side sectors.
Why are the three price indices not reporting the same number?
The CPI and RPI are calculated using supermarketās selling prices instead of foodservice wholesale prices; these marketsā movements are distinctively different. It should be noted that these indices are experiencing the highest increases in 4 years. Because there is intense competition between the āBig Fourā supermarkets (Tesco, Sainsburys, Morrisons and Asda), these businesses are (for the moment) absorbing food inflation costs and therefore reducing the inflationary impact to the consumer, which in turn converts to a lower rate for the CPI/RPI.
The RPI tracker is higher due to the increase in housing costs over the past 12 months.
Foodservice inflationary trends and insights per category (July 17 v July 16)
- Bread u0026amp;amp; cereal 1.4%
- Coffee tea u0026amp;amp; cocoa 3.6%
- Fish 5%
- Fruit 8.9%
- Vegetables 9%
- Meat 11.4%
- Milk cheese and Eggs 10.6%
- Soft Drinks and Juices 8.7%
Negative pressures and their impact on inflation
The Brexit vote has led to a sharp fall in the value of the Pound, at its lowest Ā£1 to $1.22/ Euro 1.10 (a fall of over 15%). This has a significant impact and means that imported food will cost more. About 50% of the UKās food is imported. Itās impossible to foresee the future position of the Pound, but we do know that its fall in value will have long-term impacts.
We cannot predict food inflation with absolute certainty because of the nature of the influencers which include;
- The unpredictable world weather, which will often lead to short term fluctuations.
- Market forces (such as the drive to use more green transportation, higher minimum wage levels and pressure to remove zero-hours contracts). These forces will continue, and more will be added. They will have an impact on inflation, even if the weather was stable and the Pound remained strong.
- Increases in energy and transportation costs.
- The drop in value of the Pound makes our exports competitively priced overseas which creates shortages in the UK.
- No member country has ever left the EU before. No one knows what trade deals will be struck.
- Increase in cost of labour.
With more suppliers paying London Living Wage and the increasing minimum wage and workplace pension contributions, supplierās payroll costs are increasing. These can increase payroll costs by up to 9%, taking in to account the planned legislative increases up to 2020. This will also have a direct impact on the supply chain as suppliers attempt to recover their overheads by increasing the cost of their products.
Europeās influence
Strong economic data from Europe is part of the reason for the drop in the Poundās value. The pound has underperformed against most other major currencies this year, due to the reduction in its value after the UKās referendum decision to leave the EU last year.
Regardless of personal views, the decision to leave the EU has created uncertainty in the short to mid-term, this affects the markets and confidence in the Pound. This uncertainty is compounded by a weaker UK government, a possible election within the next few years and a lack of clarity around transition and trading arrangements.
The Office for National statistics reported in August 2017 that following the referendum decision, EU nationals are leaving Britain. One of the reasons is that a weak sterling makes the UK unattractive for EU workers because their wages are subject to exchange losses. The outflow was most pronounced among citizens from Poland, Hungary and the Czech Republic. Similarly the number of people choosing to come to Britain has declined. Itās widely recognised that this is already leading to skills shortages in hospitality and food production (like butchery) and seasonal farm workers for fruit picking etc. These factors will ultimately drive foodservice costs up.
What the BM procurement team are doing
To ensure our purchasing delivers value for money we independently benchmark our prices against our competitors. To do this, we engage the services of Quenelles who monitor food prices for the catering industry. https://www.quenelles.co.uk/what-we-do The last benchmark was undertaken in April 17 (next benchmark due October 2017), the result showed that our shopping basket of prices (1,000 core lines) was 8.58% better than average for contract caterers.
- Our Purchasing Director conducts monthly briefing sessions providing inflationary updates to keep our managers and clients informed.
- Our procurement policy is not to enter into long term contracts, ensuring our suppliers stay sharp and focused.
- bartlett mitchell has a āgood to do business withā reputation amongst our foodservice partners. Suppliers actively seek the opportunity to trade with us. This allows us to negotiate tenaciously (and fairly) ensuring we always get a good deal.
- We engage multiple suppliers in our fresh food categories to ensure suppliers are in a competitive environment to gain market share. In line with our ethical business practices, this also ensures we donāt allow a supplier to be overly-reliant on our business.
- We negotiate our fresh food prices on a monthly basis (fruit, vegetables, meat and fish) which enables us to negotiate effectively by tracking market trends.
- Our chefs and managers have the autonomy to decide which suppliers they engage (from our approved supplier listing) which reinforces the competitive environment suppliers are trading within.
What our catering teams are doing
This is how our teams are taking a proactive approach to mitigate the effects of inflation.
Download our guide to understanding food inflation in contract catering here
Expert advice
To share best practice, we have developed bartlett mitchellās expert guides for workplace and contract catering. Download the pdf guide to Mitigating the effects on foodservice inflation or read our expert guide on how to develop a contract catering strategy. Our team are continually focused on coming up with solutions to mitigate food inflation, please talk to your Area Business Manager to discuss other ways we can support you.
