With hindsight it now seems strange that just a few years ago it looked as if we were entering a period that few retailers had previously experienced deflation whereby retail prices were falling month-on-month. And if you’ve been watching the news recently and caught the most recent release of inflation data from the ONS, any mention of ’deflation’ must seem even stranger. It was therefore interesting to receive a copy of an independent report*, which concentrated specifically on shop price trends to April 2017. Interesting not least for the reason that it was headlined "Four years of falling prices but change in sight". It confirms that as far as purely retail shop prices are concerned, we have indeed been living in a deflationary environment for the past few years but that this period of deflation is now showing signs of ending and is very likely to change to inflation again in the coming months. Their overall result for ’all shop prices’ showed a decrease of 0.5% in the 12 months to April 2017 compared to the corresponding period to April 2016 with the commentary that this was the lowest rate of decrease since November 2013. That overall decrease was then split down between food (where price inflation was +0.9%) and non food (where price deflation was -1.4%), which corresponds with anecdotal evidence from shoppers and retailers.
Virtually every time that any of the big supermarket chains report their quarterly, half-yearly or annual results, we read that they’re struggling to pass on grocery price rises from their suppliers to their customers. Those factory-gate price rises are largely driven by a combination of real global commodity price increases coupled with the lower value of sterling since the Brexit result a year ago.
As the same report points out, manufacturers and producers have actually seen their input costs rise by over 17% in the same period, but have only passed on increases of under 4% to retailers in that time. That relationship between inflation faced by producers and what they have been able to pass on to retailers was perhaps best-illustrated by the ’Marmite-gate’ headlines last autumn, but sooner or later the pressure differential will become too great and retailers will have no choice but to accept price increases from suppliers and try to pass on as much of the increase to their customers as they dare.
Price change reports point to one thing
These price change reports point to one thing: whatever inflation we’re already seeing is only part of the story. In terms of goods whether food or non food there’s already a lot of inflationary pressure built up further back in the supply chain, and eventually that will have to feed through to retailers. And those retailers can’t absorb all of the rising costs themselves they can only watch their gross margins erode so far.
Which brings us to consumers: hot on the heels of the ONS inflation report, was their report on UK wage rates for the first quarter of 2017, showing average weekly earnings rose by 2.2% (excl bonuses) or 2.3% (incl bonuses) during that period.
So at the headline level, we find that consumer incomes are already starting to fall behind increases in CPI and RPI; and it seems likely that while the wage trend is downwards, the price trends are heading north.
No wonder that some recent media headlines have spoken of a ’perfect storm’ facing retailers later this year as consumers simply cut back on any unavoidable spending because they won’t have the disposable income to spare.
Looked at in these terms, the short-to-medium term outlook for retailers seems rather bleak. But bleak needn’t mean terminal. For a start, it’s quite likely that all retailers will face the same pressures: the largest or most powerful may be able to defer the outcome for longer, but they won’t be able to avoid them for ever. And, of course, this won’t be the first time that retailers will have faced rising prices and restricted demand in many ways it is back to ’business as usual’.
As in the past, those who will come through the storm will be those with real, accurate and up-to-date information about their trading position at all times.
So we’re talking about having accurate and timely accounts and using them. Not very original perhaps, but to navigate through a storm you really should have as much reliable information and advice as you can get, preferably before the first waves hit.
* BRC-Nielsen Shop Price Index April 2017