Opinion: Winning on the other side of inflation

Food and drink businesses need to think about the future and devise strategies with a ‘post-inflation’ lens, says Claire Dannatt, Partner at OC&C Strategy Consultants.

As with many sectors, there are plenty of concerns within the food and beverage industry about the impact of inflation. In July, factory gate prices rose to the highest level since 1997, and the sector is trying to respond in a way that protects margins while keeping consumers on side.

However, while it is tempting for food and drink companies to focus only on the immediate issues, the most successful businesses are often those that keep their future priorities in mind, even during difficult periods. While there are certainly still challenges ahead, we are seeing early signs that inflationary pressures will recede in the medium term.

Many of the drivers of inflation today, namely food and natural gas shortages, are short-term shocks as opposed to fundamental structural issues. Consumer goods suppliers should use this window to plan for what might come next.

Russia’s invasion of Ukraine and blanket blockade on port exports has driven food insecurity around the world, as Russia and Ukraine jointly account for 29% of the global wheat export market. However, there have been recent signs of alleviation.

In early August, a ship carrying Ukrainian grain left Odesa for the first time since Russia’s invasion. To supplement this, other geographies are increasing their production to substitute for the agricultural loss.

Australian wheat crops, for example, will plug much of this gap. According to the Australian Department of Agriculture, Fisheries and Forestry, upcoming winter crop planting is forecast to be the second highest on record at 23.4 million hectares. As a result, production is expected to reach 50.9 million tonnes, the fourth highest on record.

Meanwhile, wheat and soybean futures fell about 15% in July, corn dropped 13% and palm oil plunged 30% from its peak. Decreasing food prices, coupled with decreases in soybean oil and similar commodity prices, could foreshadow cheaper household items.

Crude oil futures are down more than 10%, which will have other knock-on effects, such as lessening manufacturing and production costs. These are clear signs that the drivers of inflationary shocks are softening and that better times lie ahead.

The only way is up – then down 

Suppliers should recognise the short-term nature of inflationary pressures and be wary of implementing wholesale changes to their business models without considering the post-inflation landscape.

On the way up, options may be limited, but when deflation arrives, as seems possible in the medium term, a number of strategic choices will become available.

For instance, prices could remain high to maximise profit. This can be justified by premiumising an existing product, which may work alongside the long-term brand strategy.

However, whether this is attractive or not will depend on how others set their price strategies, as well as ongoing macroeconomic factors such as central bank interest rates and the looming prospect of recession in the UK, which might impact consumer spending. It is critical for businesses to assess how inflation has impacted their target consumer groups and to monitor their competitors’ activity.

A different strategy would be to take advantage of falling input costs by dropping prices, which could help drive gain market share. This could maintain competitiveness if the market pricing shifts down, or accelerative competitiveness if others act differently.

The possibility of becoming the price leader will be dictated by the margins suppliers and retailers have to play with, which in turn is determined by how successfully prices were passed on to consumers during the inflationary period.

The longer-term view can also have implications for the short term. Slow action on price is dangerous. A worst-case scenario would be left trying to drive price increases after inflation has already receded. More importantly, extended conversations on price get in the way of other necessary activities that support brand and portfolio evolution.

There are many strategic options available, each requiring a careful understanding of a business’s branding and target customer profiles. It also depends on the strategies of others in the market – across both suppliers and retailers.

Finding the right strategy for your businesses might take time, so it is imperative to start thinking about this now to avoid being caught off guard by deflation.

We’ve heard the saying again and again over the past few years, but it still stands: never let a crisis go to waste. Disruption drives change, and dwelling too long on crisis response will come at the expense of future opportunities. Now is the time to be hopeful and start planning for recovery.