Middle East Briefing: Pricing and negotiations

The conflict is lifting food inflation expectations again

Escalation in the Middle East is starting to feed through into higher food inflation expectations, mainly by increasing uncertainty and the perceived risk around supply, logistics and energy-linked costs. This matters because it changes behaviour now: retailers become more defensive on price, suppliers push harder for protection, and negotiations slow as both sides try to limit downside risk.

Food commodity prices are not as high as they were, but they are rising again. IGD expects food inflation to remain elevated in the coming months, with upside risk if disruption to global energy markets persists. Under IGD’s food inflation forecasts, food inflation could briefly rise to over 8% by June 2026 in the most severe (but short‑lived) energy shock scenario.

From cost pressure to pass-through tension

Even where cost pressure is not directly conflict-driven (for example, labour), the renewed volatility raises the question of pace and persistence of pass‑through. Some categories will move faster than others (fresh can react sooner than ambient), but overall, the impact is the same: more cost pressure accumulating across the supply chain, and more friction over where that pressure ultimately sits.

• Expectations are shifting faster than prices: even before full costs show up at shelf, the fear of renewed inflation changes decisions, more caution, more scrutiny, slower sign-off.

• Baseline expectation: ~3–5% annual food inflation: this is the ‘manageable but uncomfortable’ range, low enough that big list price moves are hard to land, but high enough that cost recovery and margin protection remain live topics in every negotiation.

• Pass-through is the battleground: when consumers remain value-focused, neither retailers nor suppliers assume they can fully pass costs on, so pressure accumulates and gets contested through trade terms, promotional funding, and timing.

Pricing behaviour: why nobody wants to move first

Retailers are increasingly reluctant to be first to move on price, up or down. The commercial risk feels asymmetric: price increases are highly visible and can damage value perception quickly, while price decreases are hard to reverse and can reset shopper reference prices.

This is why negotiations can feel harder even when inflation is lower. It’s less about pure margin maths and more about confidence and trust: confidence that costs are real and sustained, and trust that partners won’t exploit a volatile moment to lock in structural gains.

Promotions: high intensity, low effectiveness

Promotional activity remains intense as retailers compete for traffic and attempt to protect price image. But effectiveness is falling consumers are more selective, deal mechanics are familiar, and “promotional noise” is higher. The result is a tougher environment for both sides; more time and money spent on activity that delivers weaker incremental volume.

• Trade spend comes under the microscope: retailers push harder for funded promotions; suppliers push back unless ROI is clear.

• Net price becomes more volatile: list price may not move, but effective shelf price fluctuates, complicating price architecture and range decisions.

• Value cues matter more than depth: sharper focus on entry price points, multi-buys that feel “practical,” and targeted offers rather than blanket discounting.

Other cost pressures ‘floating’ in the system

Extended Producer Responsibility (EPR) and other compliance-related costs are not consistently or fully passed through to shelf prices. Instead, the cost sits between trading partners, creating a form of margin pressure that is ‘floating’ in the system. That floating pressure shows up as tougher asks in negotiations, greater scrutiny of cost breakdowns, and less willingness to absorb any additional inflationary shocks.

Profit rebuilding matters, but margins remain under intense pressure

Food margins are still extremely tight. IGD’s Where does your food pound go? research shows that across nine everyday grocery items, just 29p of profit is generated from a c.£20 basket. That underlines how little financial headroom exists across the food system.

Profit therefore matters, not as an abstract goal, but because it underpins the ability to reinvest in availability, resilience, productivity, and service levels across the supply chain. Without sustainable returns, capacity and capability erode over time.

This pressure is particularly acute for retailers. Core grocery retail operates in a structurally low‑margin, highly competitive environment, with very limited scope to raise prices on everyday food without losing volume. As cost pressures from labour, energy and regulation persist, profit generation has increasingly shifted beyond core grocery margins.

IGD’s Broken retailer economics analysis shows how many retailers are responding by:

• monetising assets such as retail media, data, property, and partnerships

• driving large‑scale productivity and efficiency programmes

• shifting the sales mix toward higher‑margin, value‑added categories

These strategies help sustain retailer viability, but they also shape commercial dynamics. When margins on core food remain under pressure, tolerance for unfunded cost increases falls, scrutiny intensifies, and negotiations become more positional.

At the same time, the environment for profit rebuilding remains politically and reputationally sensitive. Consumers continue to feel cost‑of‑living pressure, and any perception of unjustified margin expansion risks rapid pushback from retailers, consumers, and policymakers. The challenge for businesses is therefore not whether profit rebuilding is needed, but how it is explained and delivered, with evidence, transparency, and a clear link to the long‑term health of the food system.

Implications for food businesses

• Why negotiations feel harder even when inflation is lower: volatility increases risk, raises the bar for proof, and makes retailers more defensive about price image—so discussions slow down and become more positional.

• Read retailer behaviour through a confidence-and-trust lens: where trust is high, price changes can be agreed quickly; where trust is low, every input is challenged and trade terms become the battleground.

• Pressure-test your plan for 3–5% (and up to 8%) inflation: define what you will fund, what you will reprice, and what you will change operationally to protect both value perception and sustainable returns.

Where to go next

To strengthen your commercial and negotiation narrative, revisit IGD’s Where does your food pound go? research, which provides robust evidence base on where value is created and captured across the food supply chain.

For a retailer‑specific lens, IGD’s Broken retailer economics analysis explores how grocery retailers are adapting to persistently thin margins - and what this means for pricing, negotiations and future investment decisions.

In summary

The Middle East conflict is not rewriting the commercial rulebook, but it is raising the temperature. In that environment, the winners will be those who combine disciplined price execution with high-trust, evidence-led negotiations.