Everyone must eat, but despite surging prices on the supermarket shelves it feels as if there is an ecumenical nonchalance when it comes to saving a UK food system in need of rescue.
That’s not to say that none are suffering – many are finding it very difficult to cope with food prices that as of August were still rising by 13.6% on an annual basis. According to the BBC Good Food Nation survey out yesterday, more people are eating less healthily as they increasingly rely on cheaper processed meals to feed their families.
Food producers are also feeling the pain. Figures out today from corporate finance house Oghma Partners show there were 37 mergers and acquisitions across the UK food and drink sector during the four months to the end of August, a 68% increase on the same period a year earlier.
Most of these deals had an estimated value of £10 million or less, and more tellingly, there was a surge in distressed M&A activity when compared to the first four months of the year with 27% of deals being an acquisition out of administration.
“Business models have been challenged by the rise in the cost of debt as well as the cost of raw materials combined with a more value-focused consumer,” observed Mark Lynch, partner at Oghma.
Despite a flurry of sound bite activity back in May when the Prime Minister hosted his “Downing Street Food Summit” – which briefly gave rise to talk of a voluntary cap on the price of some basic items – there have been no subsequent announcements of substance on the issues of food price inflation, fairness within the supply chain, or help for farmers to invest in domestic production. It seems the bare necessity of eating will feature marginally at best in the forthcoming electioneering for the UK Parliament.
The Downing Street summit took place when supermarket prices were rising even faster than currently with food inflation hit a peak of 19.2% in March, the highest in more than 45 years. While it has eased somewhat in the last few months, it remained by far the biggest contributor to August’s Consumer Price Index (CPI) inflation reading of 6.7%, more than three times the Bank of England’s official target.
Getting food from farm to fork is a massive, complex business that has been hit by surging energy prices, higher labour costs, and a chronic shortage of workers made worse by Brexit. There are no quick fixes in such scenarios, which is likely why the security and affordability of food has taken a back seat to more populist campaigning rhetoric such as easing back on climate change commitments.
Within this landscape of broken food policy the supermarkets have become a lightening rod for criticism, providing an intriguing backdrop to tomorrow’s interim results announcement from Tesco. The UK’s largest food retailer with more than 27% of the market isn’t likely to report much of an advance on profits in the first six months of last year as the war to win and retain cash-strapped customers rages on, but what will be interesting is what it has to say about continuing to manage the conflicting demands brought about by inflated prices.
In July the group reported seeing customers switching to Tesco from pricier competitors such as Waitrose and M&S for the ninth consecutive period, leading to a 14.9% increase in sales of its Finest range in the first quarter of the financial year. It also said that it was successfully keeping discounting rivals Aldi and Lidl at bay.
Going back a little further to Tesco’s performance for the 12 months to February 25, pre-tax profits fell by half to £1 billion in what chief executive Ken Murphy described as “an incredibly tough year”. However, others such as Sue Davies at consumer group Which? have questioned whether major supermarket retailers are doing enough to keep prices down.
“These results show that Tesco is doing very well during the cost-of-living crisis while millions of its customers struggle to put food on the table due to soaring grocery price inflation,” she said at the time. “It’s clear that Tesco and all the major supermarkets could be working harder to make food more affordable for customers who need help.”
Tesco highlighted that it was funnelling large but unspecified amounts into its Aldi Price Match, Clubcard Prices and Low Everyday Prices campaigns to help shield shoppers from inflation. During the year it also made its “biggest ever investment in pay” of £450m to take wages for staff to £11.02 per hour.
Shareholders received a £516m end-of-year dividend, down from £588m the year before. Mr Murphy said he was “very comfortable” with the payout as it was “balanced relative to other stakeholders we have responsibility to look after”.
Investors can also cash in on Tesco’s ongoing capital return programme in which the group is buying back a further £750m of shares during the 12 months to April 2024. This is on top of the £750m of shares repurchased in the previous 12 months.
As for the group’s suppliers, Mr Murphy said in April that Tesco is “robustly challenging every cost increase”, an industry-wide trend that has farmers and food manufacturers warning that they are struggling to survive under current practices.
As if all this weren’t enough, it was reported yesterday that Tesco has been urging some of its suppliers to plant more crops as climate change threatens to spoil more of their harvests. The deal with two of its largest suppliers of onions and carrots comes amid predictions that more fields will have to be planted to maintain current levels of output.
Details of who will pay for those extra crops that are expected to go to waste have not been made public, but if Tesco isn’t footing the bill then someone else must. That cost will in one form or another make its way to consumers, either via higher prices at the tills or through financial support from the government.