Magazines Archives - 2008 July

Escalating food prices influencing consumers’ spending habits
Story 7 - Food Business Asia

AS food prices escalate, consumers are expected to eat out less and buy more discount products.
This is according to research company Deloitte Touche Tohmatsu’s June 2008 report, Food and Beverage 2012 — A Taste of Things to Come, which identified four causes of increasing food
prices: Higher consumer demand; escalating industrial demand for bio-ethanol production; declining agricultural land use and efficiency; and high oil prices.

“High relative food prices should lead to increased purchasing of lowpriced private-label and discount products, and shopping at low-priced retailers. It should also lead to a shift away from eating meals outside the home. These trends appear to be under way,” Deloitte reported.

Spending on non-food products, particularly in emerging markets, would contract if food prices continue to rise in a sustained manner, it forecast. Retailers are “struggling” to stem
the food-price increases by absorbing the hikes in their margins or exerting pressure on their suppliers to take a cut in revenues, the company noted. However, the report held that retailers
and suppliers could raise prices “with impunity” if able to clearly differentiate their products, strengthen their brand equity, come up with innovative products or services and offer “superior
customer experience”.

“Experience suggests that consumers are willing to pay a premium for such things. For food retailers, rising relative food prices mean that consumers are likely to switch from eating out
to shopping for food for home consumption. All things being equal, this should stimulate growth,” the report said.

It added that when inflationary pressures raised food prices in the past, “retailers were able to be profitable even in the absence of efficiency or price competitiveness because an environment
of rising prices dulls consumer sensitivity to price differences”.

“In times of product-price inflation, margins are no longer being squeezed due to higher employment, energy or property cost. Thus, from the retailer’s perspective, the current environment is not completely onerous.” Still, political decisions dictate the direction of food prices, Deloitte cautioned.
“In such an uncertain environment, retailers and suppliers must be prepared for various scenarios, including the worst. They must exhibit flexibility, minimise costs, maintain multiple supplychain
choices and endeavour to clearly differentiate from competitors in order to maintain pricing power relative to ... competitors’,” Deloitte stressed.

“This will require strong brand management in several dimensions; not only must retailers and suppliers convince consumers of their favourable valueproposition, but they must also convince
each other.”

US market A similar survey conducted by consumer research firm Mintel reveals that in the US, fewer Americans are dining out as the slowdown in the economy continues to hound the country.
The survey, conducted in January 2008 and released recently, claims that 54% of Americans who used to dine out regularly have cut back on restaurant spending, in light of rising gas and food
prices, as well as home foreclosures and the fear of a recession in the US. Of this figure, 70% has cut back by eating out less, rather than choosing cheaper entrees or dining at less expensive
restaurants, said Mintel.

“People aren’t trading down for cheaper or lower-quality food; they’re just trading out,” explained David Morris, senior analyst at Mintel. “Especially when you consider the price of
casual and fine dining, staying in can reduce costs significantly.”

However, the patronage of restaurants has remained “consistent”, the survey observed. “Three-quarters of survey respondents went out to dinner at least once in the past week (prior to the
period of survey). On the average, people who dined out reported eating 2.3 evening meals at a restaurant in the past seven days,” Mintel said.

On the other hand, home cooking has been getting more attention, with 72% of the respondents regularly cooking at home as a cheaper option. With consumers now more pricesensitive,
restaurants would do well to take this into consideration, Mintel advised.

“As people try to curb their spending, restaurants have to focus more on price and convenience to draw them in,” Morris maintained. “The recession is taking a toll, but certain innovations
can help restaurants succeed.” “By highlighting cost savings, all restaurants can maintain steady business,” he added.

Mintel supplies consumer, product and media intelligence. The company has a presence in Chicago,
London, Belfast, Sydney, Shanghai and Tokyo.

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