Price pressures
Published:  07 September, 2007

Even though the cost of key raw materials, including flour, dairy and vegetable oil products, is rising at phenomenal rates, several of the supermarkets are in the midst of a price war.

Last month, Tesco launched a £4 million advertising campaign, boasting about its low prices and Asda announced £250m of price cuts, including Warburtons' Sliced Rolls 12-pack, which went from £1.25 to £1.

Asda's economists compared the price of 26 everyday groceries. In 1997, these cost £29.39, dropping to £29.10 in 2007, it said. Meanwhile, one supplier to the major retailers has reported that a pack of its doughnuts was selling at 75p in the 1980s, but today, the same products sell at 65p.

This may be good news for the customer, but suppliers say they are under mounting pressure as the costs of raw materials rise at alarming rates, and they are calling on the multiples to agree to price rises.

The price picture is grim. Many suppliers report that ingredients costs have shot up - with, for example, soft fruit prices up 150% year-on-year and cream prices up 30%.

Gluten and yeast prices have also seen double-digit percentage growth. Pea and potato harvests were down this year due to the wet weather in July. And according to the National Association of British and Irish Millers (nabim) figures, the price of breadmaking wheat has almost doubled over the last 12 months, reaching record levels. On top of that, the UK harvest is about 10% smaller than anticipated, said Alex Waugh, director-general.

Animal feed has also seen almost a 100% rise over the past few months, so bakers who use meat in products, such as pig meat, are facing additional increases. Stewart Houston of the British Pig Executive (BPEX) has estimated that farmers are losing £22 a pig due to price hikes in animal feed.

He said: "I have already spoken to senior executives from the major retailers and I will visit them to make sure they have a full understanding of just? how serious this situation is and str?e?ss the need for immediate action. Something needs to be done in days, not weeks."

Ron Middleton, sales director of Meadow Foods, which supplies products such as butter, cream and milk powders, said the unprecedented dairy prices had "taken everyone by surprise", particularly the pace and extent at which they had shot up. Milk had already gone up from 18p to 25p a litre over the past few months, he said, adding, "Who knows how much higher this will go? Some suppliers have hit a brick wall when it comes to asking retailers to increase their prices. The retailers are going to have to take their heads out of the sand."

Over the second half of 2006, butter prices rose to £1,800 a tonne and they currently stand at record levels - £3,500 a tonne.

Feed accounts for over 50% of the cost of raising a hen, so soaring wheat prices have seen egg prices balloon. "The price of feed is driving huge, huge problems for us," said Clive Frampton, chairman of the British Egg Products Association. "There is an awful lot of work going on to tell customers that prices are rising; bakers are pressurised by retailers so they're not keen to take price increases. But I think they understand they have to - British farmers won't continue to produce eggs at a loss."

Even worse, many suppliers predict that the crisis has yet to peak and, in the run-up to the crucial Christmas period, Frampton says: "Prices are moving quite quickly at the moment. Every indication is that feed prices are going to remain firm and probably increase."

Gary Norcott, commercial director of Staple Dairy Products, said: "We are more worried about the availability of butter rather than its cost. As we progress further into the trough of production, processors are reluctant to offer forward prices past one month, for fear of not having the milk available."

Adding to the problem are issues such as growing demand in China and India for dairy products and drought in Australia, as well as higher demand for cheese and small milk production in the EU.

Said nabim's Waugh: "At the moment, apart from price, the main problem faced by the milling sector is availability." He added: "If businesses do not put up their prices and soon, I will not be surprised if there are casualties."

The Greencore Group, which supplies products, including cakes and sandwiches, to major retailers, also called for price increases. Jonathan Grant-Nicholas, group communications director, said it was dealing with the price increases by maximising efficiency and had recently appointed a group purchasing and supply chain director. He said: "It is only natural that the supermarkets would want to keep their prices down as much as possible. But there is no doubt that these unprecedented commodity increases should be fed through to the consumer."

"There is a commodities crisis upon us and there aren't any hiding places," said Guy Hall, strategy and marketing director of bakery firm Maple Leaf UK.

So with all these pressures on suppliers, are the major supermarkets showing any signs of pity by easing up their prices? Many of the multiples and major retailers say they are willing to accept that inevitable price increases are on the horizon. "As with any product, if the cost of bakery goods goes up, then retail prices will reflect this," said a spokesperson for Tesco. "That said, we will always work hard to ensure prices are kept as low as possible for the consumer."

Michael Hanley, bakery buyer for Asda, commented: "As far as Asda is concerned, we have an excellent working relationship with our suppliers and, as with any raw material price increases, we will work with them to minimise the impact on product cost and retail price."

Now that the national press has picked up on the rising commodity prices, highlighting the problem in the public domain, "the consumer is aware and thus can apply logic to purchasing decisions at the point of sale", added Hanley.

Shaun Walsh, category trading manager for bakery at The Co-operative Group said the retailer was working closely with its key bakery partners to "ensure that we accommodate these issues in such a way that we minimise any impact for all the stakeholders involved". He added: "We recognise that there are unprecedented levels of cost pressures within the bread market."

But with one industry source estimating that 14p needs to be added to a loaf of bread, just to cover raw material costs, the supermarkets will need to take a really deep breath.

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=== COMMODITIES ===

Prices for breadmaking wheat have almost doubled over the last 12 months, to £200 per tonne

Recent milk auctions in Northern Ireland were (average prices/litre) 26p in June, 30p in July and 34p in August, a trend which GB farmers are trying to replicate

Milk powder in 2006 was £1,500. Now it is £2,700-£2,800 per tonne

Over the second half of 2006, butter prices rose to £1,800 a tonne; they currently stand at record levels - £3,500 a tonne.

Cream generally keeps track with the butter prices, although lags behind, or in front, from time to time. Current bulk prices are over £1.50/kg

According to the Association of Bakery Ingredients Manufacturers, over the last six to 12 months: starches are up 30%; wheat starch is up 45%; dextrose is up 30%; lactose is up 100%; whey is up 100%; and rape seed oil, palm oil and sunflower oil are up 30%




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