What’s the issue?
Affordability is a key component of food security. Whenever safe and nutritious food is not available at a price affordable to all, then the welfare of some people is jeopardised. Throughout modern history, the tendency has been for food affordability to improve, relative to income, but this is not a guaranteed trend.
Threats to affordability may either be persistent or temporary.
- If the global food system is not able consistently to keep raising supply in pace with growing demand then food inflation would trend upwards
- Wider problems in the economy could result in more people finding food unaffordable, irrespective of the trend in food prices
Originating from transient events, such as
- Economic cycles
- Lags in supply matching global demand
- Short term market failures (eg: export bans)
- Supply-side shocks (eg: due to disease or bad weather).
- Low stocks to buffer against shock events
Although, not as big a concern as persistent problems, these can still have long-lasting impacts. For instance, poor diet in infancy can affect people’s health throughout their life.
What risks does this present to individual food companies?
The health and social impact is by far the most important consequence of unaffordable food but there are other, business-specific concerns:
- Reduced volumes – shoppers may reduce consumption, either through choice or necessity
- Changed preferences – shoppers may trade down the price hierarchy (eg: choosing cheaper meat cuts, choosing value own brand over standard), which implies reduced turnover
- Declining shopper loyalty – shoppers searching for the best deal are likely to switch readily between products and vendors, especially in a market where a lot of information is available online
- Food crime – rising food prices may incentivise more criminal activity including adulteration, counterfeiting and theft
- Political – if food affordability becomes a growing concern then various government interventions are possible, including some forms of price control; businesses may also be scrutinised further by the media, NGOs etc
A key challenge for companies, whenever costs are rising, is to keep food affordable without undermining quality or ethical attributes (eg: to deliver affordable meat without compromising animal welfare).
What’s been the story so far?
For most of the Post-War period, food has become gradually cheaper in the UK and elsewhere, when considered in real terms (ie: food price inflation has lagged behind both general inflation and income growth).
Between 1993 and 2002, UK food prices rose by 14% but prices for other goods and services rose by 27% and average household incomes rose by 25%.
More recently (from around 2005 onwards), the trends have been reversed owing to a range of factors:
- Currency changes, making imports more expensive
- Economic, fiscal and financial events
- Rising prices on global markets for food and food inputs (eg: agri-chemicals, fuel)
From 2003 to 2012, UK food prices rose 41% versus 33% for other items. Average household incomes fell by 3% over the same period once housing costs are subtracted. (Source: DWP)
Globally however, production of basic foodstuffs continues to increase and calorific output per-capita is at record levels. Nevertheless, global food prices have recently been trending upwards mainly because of dietary changes and in particular, the rapidly growing demand for meat and milk.
What can companies do to reduce their own risks?
Various techniques exists for companies to mitigate rising costs and these include:
- Forward buying and other financial risk management techniques to hedge against temporary cost increases
- Lean Thinking – a systematic approach to identifying and eliminating non-value adding activities
- Value Chain Analysis – mapping activities along a supply chain in order to identify improvement opportunities
- Waste elimination – a zero tolerance policy towards waste which includes identifying and resolving the root causes
- Strategic supply chain alliances – exchanging data, pooling knowledge, improving visibility, enabling teamwork and sharing the benefits from supply chain improvement activities
- Regular competitive tendering – relying on competitive forces in supplier markets to keep down costs (although this approach may not be sustainable without real supply chain improvements)
- Product reformulation – finding alternative lower cost ingredients (although this risks consumer disaffection if quality is jeopardised)
- Adopting cost saving technologies
What can companies do to act responsibly?
- Approach cost reduction in a sustainable way by making real improvements to the system rather than taking expedient decisions that might have negative longer term repercussions (such as eliminating the staff training budget)
- Be open and transparent about any trade-offs made, for instance if you change the size or recipe of a product. Maintain an open and frank dialogue with shoppers and other interested parties, discussing the issues and options
- Take practical steps to help low income households suffering particular financial stress. Options include offering a wide range of nutritionally sound but low priced products, offering advice to those working on a fixed budget and donating food to charities and food banks
Where can you go for more information?
The UK government conducts extensive research.
The Joseph Rowntree Foundation carries out extensive research on the causes and consequences of poverty in the UK
The Trussell Trust is a charity that aims to address food poverty by providing food parcels to those in need
Fareshare is another charity that works with food industry partners to redistribute food to other charities
The International Food Policy Research Institute is one of many NGOs that aim to tackle food poverty globally; they publish an annual Global Hunger Index and other research
The Food & Agriculture Organisation provides extensive research on food production and access to food globally
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