Further price increases pose threat to UK meat and dairy demand - AHDB
As prices rise, consumers make cuts
28 November 2022
8 minute read
By: Nine in 10 consumers have noticed the price of food increasing in supermarkets, with 62% concerned about food costs (AHDB/ Blue Marble Trust Research 2022), according to AHDB Senior Retail Insight Manager Kim Heath. This will come as no surprise as food and non-alcoholic beverage inflation hit 14.6% in September (ONS).
Economics dictates that as a general rule, as prices rise, consumers demand less of that good. However, with food being an essential good there is less scope to reduce that demand. Therefore, there are other ways consumers are trying to mitigate the price rise within the meat and dairy categories. These were covered in AHDB’s recent Cost of Living webinar and include trading down of products, tiers and stores. We also reported how expense has become the most prominent reason for meat and dairy reduction. As inflation is predicted to continue, in this article AHDB explores the potential impact of further price rises on meat and dairy volumes.
In the last 12 weeks significant price rises have been seen across the meat and dairy categories. Most prominently for chicken and beef within meat, and milk and yellow fats within dairy.
Contributing to this has been a scale back on promotions. Within meat, fish and poultry (MFP) 22% of volumes sold recently were on promotion, versus 25% last year. For cheese it was 21% this year versus 26% last year (Kantar, 12 w/e 2nd Oct 22). This is at a time when 53% of shoppers plan on making more of offers and price reductions in store (Two Ears One Mouth, Oct 22), and shopper data highlights the importance of deals to attract lost shoppers back to a category, as well as encourage loyalty. So, is it time to increase support on promotions?
It is also important to consider how rising retail prices impact farmers and others in the supply chain. Most farmers would see rising prices as a good thing, but its important to recognise that if prices rise to a level where customers reduce demand, this will cause prices to drop back. This has been observed in dairy wholesale markets recently. For instance, spot prices for butter fell back from very high levels in October as buyers reduced demand. If they continue to fall, this will put pressure on farmgate prices.
Analysing purchasing habits from the last 12 weeks, during this inflationary context, allows AHDB to quantify how many GB households have bought into meat and dairy categories at different price points per pack. This then allows us to predict potential buyer loss if prices were to rise further. From this we can estimate the impact on purchase volumes.
A working example – The average price point of an MFP product* was £2.91 in the last 12 weeks (ending the 2nd Oct 22) compared to £2.65 in the comparable time period last year. Based on previous behaviour 99.7% of consumers are willing to pay £2.91, compared to 99.8% who are willing to pay £2.65. Therefore, a 26p increase in price per pack results in a potential drop of 0.1% of MFP buyers who are now no longer willing to pay.
*An MFP product could be any product involving meat apart from pizza. This includes primary, processed, added value, ready meals, pies/pastries etc
However, the definition of MFP is wide, ranging from lower priced products such as sausage rolls, to higher priced products such as lamb roasting joints. Therefore, we have taken the same approach but for some specific cuts and analysed how many more potential buyers could be lost if the average price per pack were to increase further.
Of the three meat cuts we analysed, beef mince has seen the fastest increase in average price per pack (+11%) and by far the sharpest drop in buyers willing to pay the average price. This is an example of high price elasticity – consumers are highly sensitive to any price rise and respond by switching away from beef mince. In the last 12 weeks primary beef has seen switching to chicken and processed meats as shoppers seek out cheaper alternatives. If the average price per pack were to increase by another 5%, we would expect a further 10% of shoppers unwilling to pay the average price. If we assume each buyer spends equally, and these shoppers leave the category, then this loss of buyers could result in a volume loss for the beef mince category of approximately 3,200 tonnes in a 12-week period.
Pork sausages have also seen a significant increase in average price per pack in the last 12 weeks (+10%) but they appear to be more resilient as they are already a cheaper MFP option. In economic terms, the demand for pork sausages is less elastic and consumers are less sensitive to any price rise. Cheaper MFP goods are likely to be less price elastic as there is less scope to trade down or switch to less expensive options. However, if the average price per pack were to increase by another 5%, a further 4% of buyers could be lost. Using the same assumptions as beef mince, this loss of buyers could result in a volume loss for pork sausages of approximately 1,500 tonnes in a 12-week period.
Lamb roasting has seen a relatively small increase in average price per pack year-on-year at only +1%. It has therefore seen the smallest drop in buyers not willing to pay the average price. This example highlights the complexity of predicting price responses for particular food products. Different consumers respond to price increases in different ways, according to their own individual circumstances. Lamb is a relatively expensive protein and, therefore, is less price elastic due to the shopper profile of lamb consumers. However, even these relatively affluent consumers will respond, albeit less dramatically, to price rises. This is reflected in the analysis which shows that there is only so much consumers are willing to pay. If the average price per pack were to increase by 5%, 6% of buyers may not be willing to pay the new price. If we assume each buyer spends equally, and these shoppers leave the category, this loss of buyers could result in a volume loss for lamb roasting of approximately 200 tonnes in a 12-week period.
Within dairy, cow’s milk has seen the fastest increase in average price per pack by far (+32%). The reasons for this are investigated in our article on how cow’s milk remains the best value-for-money versus alternatives. However, many shoppers are still willing to pay the average price or buy smaller pack sizes to mitigate. We know dairy, and particularly milk, is seen as a staple product in many households and therefore it is naturally going to be more resilient than other categories. In economic terms, the demand for milk is less elastic and consumers are less sensitive to any price rise. This is because there is less scope to trade down tiers and fewer alternatives. Saying that, if the average price per pack were to increase by a further 5%, we estimate another 8% of buyers may not be willing to pay the average price. If we assume these shoppers leave the category and each buyer spends equally, this loss of buyers could result in a volume loss for cow’s milk of approximately 89m litres in a 12-week period. However, we need to remember that this analysis is based on past behaviour and because of these record highs for cow’s milk prices, and the fact it is a firm fridge favourite, these predictions need to be treated with caution. They do however highlight the risk to the category overall with shoppers needing to trade down pack sizes for the category to remain affordable.
Yellow fats have also seen a significant increase in average price per pack in the last 12 weeks (+22%) and by far the sharpest drop in buyers willing to pay the average price. This is an example of high price elasticity – consumers are highly sensitive to any price rise and respond by trading down withing the category or leaving it completely. In the last 12 weeks, yellow fats have seen switching from block butter to margarine as the price gap widens, as well as shoppers leaving as they do not deem it essential. For example, you can opt to remove butter from a cheese sandwich as it is not a main component, but you can’t remove the cheese. If the average price per pack were to increase by another 5%, a further 4% of buyers may not be willing to pay this and could be lost. If we use the same assumptions as we did in milk, this loss of buyers could result in a volume loss for the yellow fats category of approximately 2,800 tonnes in a 12-week period.
Cheese has seen the smallest price per pack increase year-on-year (with supply agreements typically being fixed for longer term compared to other dairy categories), at +14%. Despite shoppers remaining loyal (as mentioned above cheese is typically a key component of a dairy based meal), we do know people are trading down tiers and stores to ensure they can still stock this family favourite. If the average price per pack were to increase by another 5%, a further 1% of buyers could be lost. Again, if we assume the same as above, the loss of buyers could result in a volume loss for cheese of approximately 1,100 tonnes in a 12-week period.
This analysis gives us an idea of the scale of impact price rises have on meat and dairy categories. As prices rise, demand inevitably falls, until we find a new equilibrium. The findings highlight the continued need for tactical and strategic support to ensure categories remain in shopping baskets, because we know that once shoppers have left a category it is hard to win them back.
