Supermarkets are buffering consumers from the rising costs of food and drink, but using this as a means of protecting footfall is ultimately unsustainable, warns trade credit insurer Atradius.
Poor harvests and increased farming costs have created a turbulent period for the food and drink sector. However, in a bid to protect market share, supermarkets continue to resist necessary price increases which would bring much needed relief to the supply chain. Atradius, whose exposures on food and agriculture currently total around 15% of its overall UK cover, believes this places the sector in a precarious position and more needs to be done to safeguard margins in the sector.
Darran Tilke, senior risk underwriter at Atradius, said: “In a year dominated by adverse global weather events, harvests have been poor, which has badly affected volumes of key agricultural commodities. Lower volumes mean higher pricing, which has a knock-on effect throughout the supply chain, not least on the meat industry as livestock feed prices rise. There has also been a significant increase in on-farm costs, with diesel, energy and fertiliser all placing a further squeeze on growers and manufacturers alike.
“Though food tends generally to be resilient to the ups and downs of an economic cycle, it has accounted for over 20% of our claims this year to date. At the end of H1 2012 insolvencies in the sector stood at double the figure for the whole of 2011. Unusually, food sales have been comparatively soft as a result of dips in consumer confidence and disposable income. Large food retailers have reported mixed food (sales) figures with even giants such as Tesco reporting no growth in the category.
“With consumers attracted to low-cost stores such as Aldi and Lidl, the more mainstream players have been competing aggressively to restore customer loyalty. Whilst consumers have experienced moderate year-on-year price increases of around 2.5%, according to CPI data, the supply chain has had to face double digit rises, placing tremendous pressure on profitability.”
Atradius believes as a consequence, consumers will see continued rises in the cost of their weekly grocery shop, until there is a rebalance in supply/demand – which is increasingly more of a challenge due to volatility in global weather systems and accelerating demand from emerging markets due to increasing affluence and migration towards a more westernised diet regime.
Tilke said: “There is an opportunity for emerging markets to play their part in enhancing the supply dynamics but this will require huge investment in monetary terms, along with the skill base to ensure allocated land produces efficient and sustainable yields. This could keep costs down for consumers, though it may not be good news for British producers in the long term.”
The food and agriculture sector accounts for 15% of Atradius’ current risk portfolio. Atradius said it collates real-time trading information on these companies, enabling it to accurately manage risks both within the sector and with individual businesses. This enables Atradius to facilitate trade by managing trade credit risks on behalf of its policyholders, the company said.