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Days of cheap food are over, say suppliers as ingredient costs soar
http://business.guardian.co.uk/story/0,,2162376,00.html
Superstore groups prepare to stomach higher prices because of far east
demand and biofuel incentives
Wednesday September 5, 2007
The Guardian

Supermarket pledges to drive down the price of staple goods and help
cash-strapped shoppers looked increasingly vulnerable last night after
Britain's biggest food manufacturer insisted even the largest superstore
groups would have to stomach higher prices from suppliers that are
struggling with steep rises in ingredient costs.

Premier Foods, the group behind Branston Pickle, Oxo, Mr Kipling and Quorn,
said a "systemic change" in world ingredient markets, with "violent rises"
in many commodities, had heralded a new era, bringing to a close almost 15
years of relatively stable, low inflation.


Finance director Paul Thomas predicted general food ingredient inflation
could reach "somewhere as high as 4% to 5%" next year.

Chief executive Robert Schofield said: "Over the past 30 years the cost of
food as a proportion of disposable income has come down from 30% to less
than 10%. It is going to edge back up ... I think we've got two or three
years of inflation at the very least."

Of central concern to Premier, which acquired Hovis bread maker RHM earlier
this year, has been a doubling in the price of wheat. The group pushed
through price rises across its bread and flour range earlier this month and
yesterday warned that more price rises were being planned unless wheat
prices retreated. Every £10 rise on the price of a tonne of wheat costs
Premier £8m a year.

Yesterday Tesco added 8p to the price of an 800g Hovis loaf and analysts
predicted a further rise of 5p to 6p.

Six weeks ago family-owned competitor Warburtons filed figures with
Companies House showing a £14m increase in its raw material bill. It saw
profits dip despite a 16% rise in sales.

Bread is among the basket of staple goods at the centre of the latest price
war between the supermarkets, led by Tesco and Asda. In June these two
launched price cuts totalling £520m and promised the move represented
just the "first salvo" in a longer battle. The supermarkets are focused on
attracting shoppers whose disposable income has been hit by five interest
rate rises within a year, volatile energy bills and only modest pay rises.

Last night Tesco issued an uncharacteristically conciliatory statement.
"Where there are genuine cost price pressures in the supply chain we are
always open to discussion with suppliers. We will continue to do all we can
to keep prices as low as possible for shoppers but when wholesale costs go
up some prices in store may follow to reflect that."

The carefully worded comment comes after the Competition Commission, which
is coming to the end of an investigation into the dominance of
supermarkets, last month ordered Asda and Tesco to hand over millions of
emails exchanged with their suppliers. Some suppliers have privately
accused supermarkets of bullying them on price.

In a robust message to the big retailers, Mr Schofield said: "I have no
intention of taking a hit on margin ... Imagine what would happen if you've
got 20% or 25% inflationary pressure on your business and you don't put
your prices up. These are numbers that put you out of business if you don't
do that."

At the same time Premier said it was looking at cutting costs on bread.
This is expected to include bakery closures and a review of distribution.
Mr Schofield said it should not cost more to deliver bread than it does to
make it, suggesting a collaborative solution with leading competitors
Warburtons and Associated British Foods, makers of Kingsmill. "Currently
you have three vans delivering to each store within an hour of each other
each day. That's highly inefficient."

Speaking after Premier announced half-year underlying operating profit at
its bread business had halved to £19m, he also pledged to raise marketing
spending behind Hovis, bringing it in line with other leading Premier
brands and responding to competitor campaigns. Premier said demand from
India and China and incentives for farmers to grow biofuels had increased
wheat and other commodity prices.

The company said the recent abnormal weather patters and impact of global
warming was not, as yet, a discernible factor. "There have been poor
harvests - but we've had poor harvests before and you'd have to get an
awful lot of them before you could say something has fundamentally
changed," Mr Schofield said.

Demand from the far east and the trend toward biofuels were driving up
carbohydrates around the world. "We can't see, from where we are sitting,
that these sorts of pressure are going to go away, so this is not a blip
... If you're buying pasta in Italy it has gone up 25%; if you're buying
tortillas in Mexico it's gone up; if you're buying bread in the UK and
Europe it has gone up." There was a knock-on impact on livestock, milk and
glucose prices, he added.

In recent weeks the National Farmers' Union and the National Pig
Association have accused supermarkets of pursuing unrealistic prices on
meat in the face of soaring feed costs. Last month Asda launched its £2
chicken - a measure described by NFU president Peter Kendall as "clearly
unsustainable and [sending] completely the wrong message."

Other recent ingredient price rises include a jump in cocoa, palm oil and
milk. Firms to have been hit include Northern Foods, Greggs and Cadbury
Schweppes.