It’s been close on three years now since I started to hear the words “perfect storm of cost pressures” being uttered by operators and industry commentators. In the period since early 2017 revenues have been fairly flat whilst costs have continued to rise, and there seems little likelihood of respite in the year ahead.
At the recent Conservative Party Conference, the Chancellor Sajid Javid set out the government’s intention to tempt low-paid workers to vote Tory in the forthcoming general election by announcing plans to increase the National Living Wage (NLW) to £10.50 an hour, an alarming increase of 28% over five years.
This is Javid’s new five-year target and includes a pledge to reduce the age at which people receive it from 25 to 21. The Treasury later said the proposal would raise the low-pay floor from 60% to two-thirds of median earnings. There won’t be any respite delivered by voting Labour either. They will go bigger and even earlier, introducing £10 as a minimum as soon as they take office, claiming that it will mean everybody over 16-years of age will be earning comfortably more than £10.50 an hour by 2024.
Investment in AI and sophisticated labour management software will certainly play a part in mitigating these costs, but operator’s ability to raise prices will be critical to ensure ongoing viability.
Apart from labour and rent, the other major cost input to business is the price of food and drink. As I write, the CGA Prestige Foodservice Price Index shows inflation in these areas at just under 7%. This relentless climb in prices has happened even after 2018, when inflation rose to a peak of 10%. Six out of the ten food and drink categories are showing inflation above 5%, and four are in double digit growth.
The factors driving this are many and complex, but the key drivers today are:
Weather – the increasing unpredictability of global climate is paying an increasing part in making food prices unstable. Fruit prices for example have risen sharply in Europe this year because of ferocious storms, particularly in Italy and some parts of Eastern Europe.
Environment – controls introduced to manage the environment are playing an increasing part in markets - fish for example has seen huge price hikes over an extended period, caused by dramatic reductions to quotas to protect stocks from over-fishing.
Currency – we import over 40% of the food we eat, and the fall in the value of the £ following the 2016 referendum has impacted these products over time, as hedging protection has ended. Exports have also been boosted, which in some markets has tightened UK supply and raised UK prices.
Whilst we should see some improvement in markets in the months ahead, it seems unlikely that any of the above factors will ease significantly for the foreseeable future.
Which leads me of course to Brexit.
This morning news emerged that the Prime Minister spoke earlier to Germany’s Chancellor Angela Merkel, and that No 10 is giving up hope of a Brexit deal because of demands that emerged from the EU on that call. Yesterday, a text message to the Spectator’s James Forsyth from a “contact inside No. 10” said:
“The negotiations will probably end this week. If this deal dies in the next few days, then it won’t be revived. We’ll either leave with no deal on 31 October or there will be an election and then we will leave with no deal.”
It seems that the Conservatives are determined to fight an election on a no-deal ticket, which obviously raises the odds on no-deal considerably.
The impact of upon food and drink costs in this eventuality are difficult to predict, not least because the reaction of the EU, the level the government supports UK farming and the degree to which it reduces import tariffs, and UK consumer behaviour in the supermarket, are all unknown. The government’s no-deal supremo Michael Gove has not thus far been drawn on the subject, preferring just to say, “Some prices will go up, and some will go down”. That statement at least is accurate.
So, here are the major influencers. We are working hard to model the outcomes, but for the moment I must leave you to draw your own conclusions:
Currency – our City advisors suggest a further fall in the value of Sterling of between 10% and 20%. This is likely to recover somewhat as any positive consequences of Brexit become clear. Imported product will rise over a 9-12 month period in line with the exchange rate impact.
Import Tariffs – the tariff schedules published by the government in February set import tariffs for food and drink (in the event of no-deal) at an average of 4% - 5%. These will be imposed day one of no-deal. This will obviously raise EU imported product prices, but some imported product will experience dramatic falls in price as EU import tariffs (which we use right now) fall away.
Export Tariffs – UK food exports to the EU will face an immediate hike in tariffs, from the current zero to some as high as 43%. This will have an immediate and dramatic positive effect upon UK supply, depending upon any government intervention. There may well be a glut of some products as widely spread as lamb/beef, seafood and cereals.
Product Availability - The challenges on short shelf-life product like fruit, vegetables and chilled product caused by the well-documented freight challenges will likely drive prices upwards, partly through the additional costs involved for hauliers, and because short-supply will inevitably drive up price.
What is certain, is that a no-deal Brexit will produce a period of significant uncertainty, in a market where we could all use some simplicity and predictability. Specialist advice on your supply chain should receive serious consideration.
Either way, we can expect that the drag of rising costs is not going to reduce any time soon.
Cost pressures continue to mount for operators
It’s been close on three years now since I started to hear the words “perfect storm of cost pressures” being uttered by operators and industry commentators. In the period since early 2017 revenues have been fairly flat whilst costs have continued to rise, and there seems little likelihood of respite in the year ahead. At the recent Conservative Party Conference, the Chancellor Sajid Javid set out the government’s intention