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Inflation
Positively for the sectoral outlook, the cost of living crisis is slowly coming to an end. Latest data from the Office for National Statistics (ONS) shows that the consumer price index including owner occupiers’ housing cost (CPIH) increased by 2.8% year on year (y/y) in June 2024 while the CPI increased by 2.0% in the same period. This is down from the peak of 9.6% in October 2022 which was roughly five times the Bank of England’s (BoE) inflation target of 2%. That said, a split between services (6.0% inflation) and goods (where prices have fallen by 1.4% y/y in June) has emerged over the past quarters.
Meanwhile, the improvements in the food and drinks industry were even larger: inflation in the sector had reached 19.2% in March 2023, a 45-year high. It exceeded the CPIH rate between April 2022 and March 2024 before gradually moving lower. By June 2024, inflation in the food and drinks industry had dropped to 1.5% only, the lowest reading since October 2021. Furthermore, price pressures in the hotel and restaurant industry have also moderated over the past quarters: between early 2023 and mid-2024, sectoral inflation has almost halved from 12.1% to now 6.3% .
For the second half of 2024 and next year, the outlook for sectoral inflation rates remains encouraging. Aggressive monetary tightening, conducted by the BoE in 2022-23 has largely removed upward pressures on prices. Simultaneously, most agricultural products have become cheaper in a y/y comparison. According to July data from the Financial Times, wheat prices have fallen by 21.2% y/y, corn has dropped by 24.8% and soy beans by 26.9% y/y. While there are some outliers (coffee and cocoa prices have risen by 70.3% and 161.8%, respectively), it is likely that the cheaper input costs will filter through the production processes and transmission channels over time, leading to subdued inflation rates in the months ahead. UK food retail market leader Tesco recently announced that it expects food price inflation to stay in the very-low single digit rate for the remainder of 2024.
Supply Chain Risk
Problematically for supply chain integrity, food imports from the EU have become more bureaucratic and costlier in 2024. After the implementation had been postponed five times during the pandemic, new post-Brexit rules were introduced in January and in April as physical checks on certain product groups such as fresh meat, fruits and vegetables were phased in. Health passes (issued by vets) have also become mandatory, adding additional red tape when exporting from the EU to the UK . While no controls have been implemented in Anglo-Irish agricultural trade yet, the old government had planned to launch checks by November, a timetable now uncertain given the recent change in government.
Challengingly, with the UK importing a sizable part of its food supply (for example 49% of its pork supply originates from the EU, 83% of all fruits sold in the UK are imported), the new trading regime will increase costs for UK companies. The British government had estimated that domestic firms will face a GBP330m per annum bill, potentially increasing inflation by 0.2 percentage points over the next three years. Encouragingly, anecdotal evidence indicates that, so far, British authorities have adopted a “light-touch” approach; physical checks continue to be the exception rather than the norm and the overwhelming majority of shipments still arrives UK customers on time.
Also positively, the UK government’s first UK Food Security Index shows that risk levels have remained stable across seven dimensions (including global food supply for human consumption and business investment) while the energy and fertiliser as well as the agricultural total factor productivity sub-indices have improved in 2024 . Problematically, global warming poses an ever-increasing long-term risk to food security in the UK while the wet winter and spring (October 2023 to March 2024 was the second wettest six-month period on record, rainfall was 60% above the ten-year average) create some short-term challenges for the UK agri-food sector.
In the accommodation and food services sector, the number of vacancies has also fallen over the past years. After having peaked at 176,000 in April-June 2022, the number of open positions has dropped to 101,000 only two years later. However, despite the fall in vacancies, the sector is still one of the most impacted ones when it comes to labour shortages. Out of 21 sectors covered by the ONS, only electricity, steam, gas and air conditioning supply had a higher vacancy ratio (measuring the amount of open positions per 100 employee jobs): with a reading of 3.8, the sector also displays a much higher ratio than the national average (2.8), virtually unchanged from the last pre-Covid reading of 3.7. Furthermore, British food and drinks manufacturers also highlight ongoing labour shortages. According to the State of Industry Report Q1 2024, published by the Food and Drink Federation in May, vacancy rates in food manufacturing are roughly twice as high as in other manufacturing industries.
Wage growth figures also point towards a gradually cooling labour market. ONS data shows that average weekly nominal earnings growth for the UK has moderated to 5.7% y/y in the three months to May 2024, down from 8.6% in mid-2023. In real terms, the picture is very different though: as inflation has fallen substantially over the past quarters, purchasing power adjusted wage growth is very high. Since April to June 2023, real wage growth has been in growth territory, reaching 2.2% in March-May 2024, the highest reading since mid-2015 (if the Covid-distorted 2020-22 period is ignored).
In a sectoral comparison, the accommodation and food services industry has seen rapid wage growth in recent months, albeit from a very low base. Out of 20 sectors surveyed, the industry has the second lowest median monthly pay, standing at GBP1,285 only (the UK average is GBP2,394).
That said, nominal wage growth in the sector has been robust in a year on year comparison, outpacing all other 19 sectors covered by the ONS. Between May 2023 and May 2024, the average monthly median pay in the accommodation and food services sector has grown by 11.1%, compared with the UK average of 6.0% only.
Agriculture, forestry and fishing (+8.3% y/y) and manufacturing (of which food manufacturing is the largest part when measured by turnover) have also seen above-average pay growth, indicating that companies’ labour costs are seeing upward pressure at the moment, thereby undermining profit margins.
Return to Office
Positively for the market potential of food services outlets (and supermarkets) in inner cities, many companies in the UK have continued with their return to office policies. Latest available data from the ONS shows that in June 2024, only 11% of all workers were exclusively home-based, down from 16% one year earlier. That said, hybrid arrangements continue to be popular: one in four UK workers are now at least being entitled to some working from home days per week with half of UK employers now offering this option.
Survey data from Remit Consulting shows that office occupancy rates had reached the highest reading since the outbreak of the Covid pandemic in March 2024 before dropping slightly again in April and May. As many companies are currently increasing pressure on employees to reduce working from home days, footfall in business districts is likely to increase somewhat going forward. That said, a return to pre-pandemic levels is unlikely: currently, office occupancy rates stand at around 35%-40%, compared with pre-pandemic readings of 60%-80%. The reduced demand will hence continue to be a drag on the hospitality industry.
Business Optimism
Positively, the country’s macroeconomic backdrop has improved in recent months. Real GDP growth has surprised on the upside in Q1 2024 and the UK has officially left recession. The IMF has recently upgraded its full year growth forecast from 0.5% to now 0.7%. Furthermore, with disposable income rising, consumer confidence is also on a generally upward trajectory. As the BoE is likely to cut interest rates in the second half of 2024, households’ willingness and ability to spend more on food and drinks is likely to grow over the next quarters.
Latest data from research company Kantar shows that take-home grocery sales increased by 1.0% only in the four weeks to 9 June, the slowest increase in two years. The poor weather also caused some unusual shopping patterns (sun care items sales are down by 25% y/y while soup sales are up by 24%) while average footfall has also stalled: the average shopper visited a supermarket 16.3 times, virtually unchanged from the same four-weeks period a year ago.
Best performing food retailer (for the fourth month in a row) was online-only Ocado. In the 12 weeks to 9 June, the company increased its sales by 10.7%, comfortably outperforming the average online market growth rate of 4.0%. Around a quarter of British households did their shopping online in the March-June period, Meanwhile, bricks and mortar supermarkets saw much lower growth in the twelve weeks to 9 June. Lidl’s sales were flat, followed by Aldi (+0.8%) and Morrisons (up by 1.1%), market leader Tesco (+4.6%) and Sainsbury’s (+4.9%).
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Disclaimer The information contained in these articles and documents are believed to be accurate at the time of date of issue, but no representation or warranty is given (express or implied) as to their accuracy, completeness or correctness. TMHCC accepts no liability whatsoever for any direct, indirect or consequential loss or damage arising in any way from any use of or reliance placed on this material for any purpose. The contents of these articles/documents are the copyright of Tokio Marine HCC. Nothing in these articles/documents constitutes advice, nor creates a contractual relationship.
Related links
https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/june2024
