Brexit + COVID + Inflation = Less Choice + Longer Waits + Higher Prices
One of the very best things about doing this job is that, at times, you get to be counsellor, confidante and critical friend to some seriously interesting people. Well, this month in those conversations, it’s been full on.
Top of the stressors is of course the ongoing supply chain issues. Let’s just pause to take stock:
- There is a huge lack of HGV drivers, around 100,000 new drivers are estimated to be needed. As of today, the governments offer of emergency work Visa’s for EU drivers to work in the UK has been taken up by just 20 new drivers so far. Early days perhaps and more are promised…. but no one in the trade is holding their breath.
- We’ve seen how a social media generated road fuel buying frenzy has led to shortages at the pumps. For me, it showed just how fragile the fuel distribution system is.
- Sea freight is in a really tough place.Felixstowe is turning away ships as it is overrun with empty containers, with real problems being experienced moving goods on and off the port. Significant shipping delays of weeks and months are now an everyday event. Other UK ports are fearing lockjams of their own. The cost of shipping a container to the UK from China has jumped four or five fold in the last six months, and wage costs have climbed rapidly.
- There is a critical shortage of warehouse space as brands – fearful of disruption – want to hold more UK buffer stock than usual combined. This, combined with the rapid growth of online delivery needing sizeable inventory to be held, has squeezed the available space. Planning laws slow the creation of new space. There is also a lack of warehouse workers from entry level to experienced.
Adding to this mix is inflation which is alive and well in the supply chain. By our calculations the average increase in raw materials is around the 9% mark and will play out over the next 6 months or so, before falling as we get into the second half of 2022. Suppliers shouldn’t be coy about passing on cost increases to customers, nor are they. Kraft, Unilever, Two Sisters and others are all looking for large increases.
Brands are responding in part by making packs smaller – so called ‘shrinkflation’ – initially attractive as the price point can be maintained. But think about it, ultimately this really is a dead end as it increases the packaging cost and waste as a percentage of the product, leads to consumer cynicism and ultimately shoppers use less of the product.
Are there any winners in inflation? Well, for the retailer, passing on cost increases in a generally inflationary environment is pretty good news – if you can hold your percentage margin, then your cash margin automatically rises. Whereas the supplier just gets recovery for legitimate cost of goods increases. I just hope there aren’t buyers out there who refuse price increases from suppliers but raise the retails anyway, surely there aren’t many old school buyers like that left?
Some of the inflation implications I am hoping are in some way positive from a husbandry and quality perspective. For instance, the average price of a chicken in the UK is £3.50 – am I alone in thinking that is too cheap and encourages waste and a disrespect for the birds? Higher prices could focus attention on the quality of feed, farming practices, antibiotic use etc which would be welcome. Perhaps a focus on why our food is so cheap could come from this period? We can but dream.
The potential for disruption over Christmas looms large. Some retailers like ALDI and Poundland are sending out calming messages but Iceland and others are calling it ‘carnage’ and a ‘train wreck’ – in public as well as private. The large multiples are keeping lips tight at the moment but privately there are very serious concerns about availability and the impact on profit. This Christmas, availability will arguably trump range and price as the key driver of where the nation chooses to shop, especially if there are shorts on some of the signature Christmas items.
The trade feels that all this will take some six months to unwind and the prospects for Christmas don’t look good – less choice, higher prices and longer waits for shoppers are certain.
While this all plays out, the Morrisons takeover by CD &R will come to its conclusion next week (on the 19th) and the trade is trying to get its heads round the implications. I’ll share a deeper dive on this later in the month but for now it’s a waiting game until that deal goes over the line.
In other news, The B Corporation movement shows no signs of slowing down. As we come to the end of our own B Corp accreditation journey (watch this space), we take a look at exactly what the corporation means for brands. How have we walked the talk? Read our impact report here.
I had the honour of interviewing CEO John Steel from Cafédirect on our podcast, The FMCG Insider. We discussed the future of coffee, social enterprises and company culture in our newly released video of the conversation, have a watch here.
Best of luck navigating these challenges, do take care of yourself and I look forward to catching up next month.
Best
Hamish
