The imminent rise in interest rates in Europe and the palpable rise in prices point to a long, cold winter. The CPI reached 10.2% in June, the highest level since 1985. Filling the fuel tank of the car costs 50% more than last year and the electricity bill exceeds 120 euros on average. The shopping basket is already suffering from the rise in food prices. The rise in mortgages threatens to destabilize family budgets. It is estimated that the cost of living for an average family per year is at least 3,170 euros higher than in 2019, according to an estimate based on the INE survey of average spending per household.
“If the war in Ukraine doesn’t end this year, the recession in Spain is certain in a year. There will be less consumption, which is the basis of economic activity,” says the IESE professor Jose Luis Nueno. Higher commodity prices are already affecting prices on store shelves. This expert defends that despite this there will be a better than expected autumn: “The tourist season may extend during the autumn, so even the final stretch of the year may be good for consumption, but there are serious doubts for the beginning of 2023 “. Nueno It anticipates that the effect of the rise in costs will be felt at least “a year after the prices of raw materials moderate, at least until March of next year.”
The PWC consultancy assures that inflation and problems in the supply chain “are already making a dent in the purchasing habits of citizens, who are choosing to focus their budgets on essential products to the detriment of others.” Manufacturers and distribution are on the alert for changes.
Consumers: White label and smaller formats
Filling the shopping cart is more expensive than a year ago. Statistics and daily experience confirm this. When it comes to quantifying this situation, the assessments differ. The Organization of Consumers and Users (OCU) calculates that the shopping basket has risen on average by 15.2% in the last year. Of the 238 products that make up that usual theoretical shopping cart, the OCU experts have only detected 13 products that have dropped in price. Consequently, they calculate that families have to allocate 830 euros more to food this year.
The products that rose the most were sunflower oil (118%), muffins (75.4%), margarine (75.2%), bananas (63.6%), pasta (59.9%), soft olive (52.6%), wheat flour (49.7%), eggs (45.9%) and mayonnaise (42.9%). Price drops are the exception, they are focused on some fruits and vegetables such as avocados (-9.6%), kiwi (-5.5%), apples (-4.8%), cauliflower (-3 .7%) and oranges (-1.5%). To these are added some drugstore and hygiene products (gel, shampoo, detergent).
The distribution expert and professor at IESE Jose Luis Nueno explains that the process of inflation due to rising raw material costs is divided into three phases. In the first, manufacturers and distribution negotiate and cushion the impact. In the second, consumers face a process of cost adjustment or ‘downtrading’, they buy cheaper products, whether they are private label or in smaller formats. In a third phase, the consumer stops buying and focuses on what is essential. That last stage has not yet arrived.
According to the consulting firm Nielsen IQ, the impact of price increases is perceived in the growing weight of the private label or private label. They calculate that it already represents 41.7% of the food and drugstore shopping basket. In food it is already more than half. Patricia Daimiel, general director of Nielsen IQ for southern Europe, acknowledges that the context of rising prices “was difficult to imagine a few months ago, and has caused a change in consumer purchasing behavior that drives the growth of the weight of the brand from the dealer versus the manufacturer, or the most frequent and lowest-priced purchases. Outside of food, rising prices are encouraging the purchase of second-hand products. The consulting firm Kantar assures that more than a third of online buyers buy second-hand objects.
Primary sector: Gas cuts in Europe and rising costs
Rising energy and fertilizer costs threaten to destabilize the agri-food market in Europe. The ups and downs in prices have marked the fruit and vegetable sector in recent months and the situation will worsen for at least a year.
The general manager of Mercabarna, Jordi Vallsassures that the “new situation this year derives from the binomial between food and energy supply. In Almería a plant is capable of producing 15 kilos of tomatoes, while in the Netherlands the plant raises that figure to about 21 kilograms. But agricultural production in the Netherlands it relies on Russian gas to generate heat. The energy restrictions planned for the end of the year will trigger agri-food costs in northern Europe, as well as livestock costs. All of this will affect final prices throughout the continent.”
The analysis of Valls This leads one to think that a large part of the Spanish production of fruit, vegetables and meat will be diverted to northern Europe due to rising prices and the search for higher margins, which will also affect prices in Spain.
In a context of the return of tourism and increased exports, activity in the primary sector is expected to be high. Good times for farmers and ranchers, in a context of higher prices. The food industry will continue to affect the final prices of higher feed prices, fertilizers or energy costs and the negotiating capacity of distribution will have been cut compared to this year.
Global warming is another element that is already influencing agricultural production. Some attribute this trend to the fact that this year stone fruit from Lleida had a production equivalent to only 30% of the usual.
The rise in sales abroad will also influence prices. Last year, Spanish fruit and vegetable exports reached 15,680 million euros, more than 1,000 million more than the previous year. In value, exports have grown 14.7% compared to 2019. The war in Ukraine has configured a scenario that especially pays for the consolidation and increase in prices this year and next.
The weight of fruits and vegetables increases in the shopping basket. The percentage of Spaniards who declare themselves vegan, vegetarian or ‘flexitarian’ has gone from 8% to 13% between 2017 and 2021.
Distribution: Reduction of packaging at the same price
The general rise in the cost of raw materials has forced manufacturers and businesses to take their strategies to the extreme. In order not to have to raise prices, some brands have resorted to ‘reducing’ or reducing packaging with the same selling price. Between reducing price or cutting weights, brands have preferred to take the second option in many cases.
The IESE professor Jose Luis Nueno explains that the brands have been in the process of cross-elasticity analysis in recent weeks. They study their ability to raise prices against the competition without losing sales. But the big fear right now for manufacturers is that rising costs and rising prices will end up with the loss of customers.
If runaway inflation increases, a third phase of sales halt will be entered. “Some product categories are holding up, such as chocolates, but others such as detergents, yoghurts or dry food are already suffering sales declines,” he explains. Nueno. The distribution has supported the sale of private labels, but prefers to sell well-known brand products and ensure higher commercial margins.
After the pandemic, the rise of online sales has greatly changed the role of the store. What has come to be called the ‘phigital’ era expresses the new stage of omnichannel. The physical store works for the ‘online’ channel and the Internet is a key tool to boost the activity of the store.
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David Sanchez, president of the Comertia employers association, acknowledges that commercial activity has recovered after the pandemic but that it has changed. Customers are demanding more added value to physical commerce, since otherwise they come to prefer online shopping. “Consumers demand an exceptional shopping experience that is worthwhile. They ask the trade for a special quality of service, which also requires the transformation of the seller, a friendly person, with a vocation for service, professional and in which age loses relevance.
In the future, physical and online sales will be confused, but experts tend to emphasize that having a physical store is an advantage for online sellers. The internationalization of commercial activity is, in the end, one of the key vectors for dealing with the possible consumption crisis in local markets, if the rise in interest rates cools down growth too much.