Resilience: economics of the food system

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Food and grocery retail is characterised by strong price competition, not only in the UK but also around the world. In Q4 2023, the top drivers of store choice in the UK were location, closely followed by price.

Food and grocery products in the UK have tended to become relatively cheaper over the long term and recent surges of inflation have not fully reversed this trend.

In 2022, on average, UK households allocated 12% of their budgets to food and drink, which compares with 31% in 1952. This is in line with European countries such as France and Germany.

This is obviously beneficial for consumers. Despite the recent increases in food price inflation, food and drink is still relatively affordable for many in the UK. In contrast, some other essential goods and services, such as childcare and housing, are relatively expensive.

Global sourcing

About 40% of all UK food is imported. Imports allow the UK to benefit from lower production costs in other countries and provide access to goods that cannot be grown domestically. It also helps to spread risk. Self-sufficiency in food is not necessarily the same thing as food security since local problems (e.g. crop diseases) can impact production.

However, high reliance on imports can create risks to resilience, with other countries likely to prioritise feeding their own population over serving the UK during periods of disruption or shortages.

Efficient supply chains

Supply chains have evolved to ensure minimal stockholding, relying on frequent and timely deliveries to maintain availability. This approach is seen as financially efficient, and it minimises the amount of valuable space allocated to storage. It can also ensure product freshness and quality.

Just-in-time delivery leaves little room to accommodate supply chain shocks or unexpected surges in demand. Many of these practices emphasise financial efficiency rather than resilience. This makes sense when food is plentiful, supply is dependable, and logistics are easy – the risk of system failure is fairly low.

Looking ahead, climate change, geo-political risks and other factors may change the balance of risk. A more volatile global economy may justify re-working systems to give greater weight to availability, stockholding and resilience.

Lack of investment

Another consequence of the focus on price is that food industry profit margins have tended to erode, especially since around 2008. This reduces resilience to economic pressure.

Erosion of profit over a long period may have made it harder for businesses to invest in areas such as productivity or sustainability, even though capital has been relatively cheap for over a decade.

This is critical as future challenges such as automation and climate change require significant investment. It is hard to find evidence that this is happening, despite government policy designed to support capital expenditure.

Concentrated production

Some food and consumer goods manufacturers have developed a model of production that uses a small number of very large factories, producing standardised products and serving multiple markets. The economies of scale that are available via this model justify the extra transport costs that may be incurred.

Concentration of production at a small number of sites may be an issue if transport is disrupted. Concentrated production also means that problems at one plant may rapidly affect a large area.

Investment markets and food

In a free-market system such as the UK, capital is able to move to wherever the best returns are available. This may include acquiring elements of the food and drink supply chain and other pieces of critical national infrastructure.

In 2020, about 19% of all business assets in the UK were foreign-owned, primarily in financial services. There is currently no central record showing how much UK farmland is foreign-owned.

Compared with other countries the UK is fairly open to investors – including overseas investors – that wish to acquire farmland and food businesses. This does not necessarily mean that UK land will be used to serve overseas markets – many food commodities are hard to move – but it may mean that any profit made is sent overseas rather than being reinvested locally.

The same point might be made about factories and other industry assets. On the other hand, foreign ownership might also be beneficial if it leads to fresh investment or brings new ideas and technological advancements.

The risk of foreign ownership in critical national infrastructure depends on the strategic role that investors expect their food assets to play within their portfolio.

IGD’s role in building a resilient food system

IGD Economics’ forecasting of food inflation, alongside its analysis of the UK economic landscape and its impact on consumers, supports business leaders to better understand the trading environment and make better decisions.