Falling purchasing power puts margins in food under pressure

Rising costs for energy, raw materials and wages combined with falling purchasing power are putting margins in the food sector under pressure. While costs are expected to drop slightly in 2023, it will be harder for food manufacturers to pass the bill further down the chain. In the first quarter, half of the companies indicated that they could pass on these costs; in the third quarter, this applies to only 44 per cent. This puts further pressure on already low margins in the food sector and limits budgets for innovation and sustainability, according to ABN AMRO’s Food Sector Forecast 2022-2023 (‘Lower purchasing power will affect the food industry’). Persistently high energy prices will therefore lead to high prices for a longer period of time.

Strong volume increase in the beverage industry (+9 percent) turns into a decline (-2 percent) in 2023
In particular, smaller food producers – such as local breweries, butchers and bakers – struggle with the high costs of energy, packaging and raw materials. In addition, after a sharp increase in 2022 (+9 percent), the beverage industry must deal with falling volumes (-2 percent). ABN AMRO expects that a decline in catering visits will lead to lower volumes. Lower volumes are also on the horizon for the dairy industry (-1 per cent) because the supply and demand side is under pressure. Global demand for dairy products is sensitive to economic developments; now that purchasing power is under pressure in many countries, the dairy industry will also feel it. Volumes in the meat processing industry (-1 percent) are expected to fall slightly, while fruit and vegetables (+2 percent) have the wind at their backs. For example, more and more consumers are replacing meat with plant-based products. Fruit and vegetables have also risen the least in price of all fresh foods, while meat has become more expensive.

There will not be a major drop in revenue in 2023, despite falling purchasing power
Although sustainability and animal welfare are important, consumers are increasingly guided by price. “For example, consumers will more often choose a cheaper house brand on the shelf than a branded product. They can also switch products between categories. For meat, for example, this means less meat – such as smaller portions – and cheaper variants – such as minced meat or chicken or less organic meat – or more vegetables instead of meat. At the same time, more sustainable products, such as organic food, also sell less if consumers are more aware of the price,” says Nadia Menkveld, Sector Economist for Agriculture and Food at ABN AMRO. “Due to this shift in purchasing behavior, we expect volumes in the food sector to come under a little pressure, but not fall sharply. And although consumers are much more aware of price, there will not be a significant drop in revenue in 2023. Costs are high after all, and prices will therefore remain relatively high.”

Consumer buying behavior has changed
ABN AMRO also expects restaurants to be visited less frequently. Furthermore, consumers are more likely to choose a cheaper private label over a branded product on the shelf, while they also do this more often in discount supermarkets such as Aldi and Lidl. And there are several products that suffer from the consumer’s saving mentality, such as convenience products such as pre-cut vegetables or more sustainable products such as organic foods. Consumers can also choose a cheaper diet by, for example, eating less meat and more vegetables. Or they may choose cheaper varieties within a category, such as ground beef instead of steak. Finally, supermarkets can create change by using promotions to better manage what consumers spend their money on.

The analysis agency Q&A Insights asked around 1,000 consumers on behalf of ABN AMRO whether they will do their supermarket shopping differently this coming holiday. The graph below shows the results. It shows, among other things, that 9% of the respondents indicate that they do not choose organic products more or less.

Click here for a larger size.

Source: ABN AMRO

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