Further price hikes threaten UK meat and dairy demand – AHDB

November 28, 2022

8 minute read

Nine out of 10 consumers have noticed food prices rising in supermarkets, with 62% concerned about the cost of food (AHDB/ Blue Marble Trust Research 2022), according to Kim Heath, Senior Retail Insight Manager at AHDB. This is no surprise as food and non-alcoholic beverage inflation hit 14.6% in September (ONS).

Economics dictates that as a general rule, as prices rise, consumers demand less of that good. However, since food is an essential good, there are fewer possibilities to reduce this demand. Therefore, there are other avenues for consumers to try to mitigate rising prices in the meat and dairy categories. These were covered in AHDB’s recent Cost of Living webinar and include slashing products, tiers, and shops. We also reported how expense became the main reason for cutting meat and dairy. As inflation is expected to continue, the AHDB explores in this article the potential impact of further price increases on meat and dairy volumes.

Over the past 12 weeks, significant price increases have been seen in the meat and dairy categories. Especially for chicken and beef in meat, and milk and yellow fat in dairy products.

Contributing to this was a reduction in promotions. In meat, fish and poultry (MFP), 22% of volumes sold recently were on promotion, compared to 25% last year. For cheese, it was 21% this year compared to 26% last year (Kantar, 12 w/e 2^n/a October 22). This is at a time when 53% of shoppers plan to do more in-store deals and price reductions (Two Ears One Mouth, October 22), and shopper data underscores the importance of offers in attracting shoppers. lost to a category, as well as encouraging loyalty. So, is it time to increase support for promotions?

It is also important to consider the impact of rising retail prices on farmers and other actors in the supply chain. Most farmers would view rising prices as a good thing, but it is important to recognize that if prices rise to a level where customers reduce demand, it will lead to lower prices. This has been observed recently in wholesale dairy markets. For example, spot butter prices fell from very high levels in October as buyers reduced demand. If they continue to fall, it will put pressure on farm gate prices.

Analyzing shopping patterns over the past 12 weeks, against this inflationary backdrop, allows the AHDB to quantify the number of UK households that have been shopping in the meat and dairy categories at different prices per pack. This then allows us to predict the buyer’s potential loss if prices were to rise further. From there, we can estimate the impact on purchase volumes.

A practical example – The average price of an MFP* product was £2.91 over the last 12 weeks (end of 2^n/a October 22) compared to £2.65 in the comparable period last year. Based on past behavior, 99.7% of consumers are willing to pay £2.91, compared to 99.8% who are willing to pay £2.65. Therefore, a 26p increase in price per pack leads to a potential 0.1% drop in MFP buyers who are no longer willing to pay.

*An MFP product can be any product containing meat, except pizza. This includes primary, processed, value-added products, ready meals, pies/pastries, etc.

However, the definition of MFP is broad, ranging from lower priced products such as sausage rolls to higher priced products such as roast lamb. Therefore, we took the same approach but for some specific cuts and analyzed how many additional potential buyers could be lost if the average price per pack were to increase further.

Of the three cuts of meat we analyzed, ground beef saw the largest increase in average price per package (+11%) and by far the largest drop in the number of buyers willing to pay the average price. This is an example of high price elasticity – consumers are very sensitive to any price increase and respond by foregoing ground beef. Over the past 12 weeks, primary beef has been replaced by chicken and processed meats as shoppers seek cheaper alternatives. If the average price per pack were to increase another 5%, we would expect an additional 10% of buyers to be unwilling to pay the average price. If we assume that every shopper spends equally and those shopper(s) leave the category, this loss of shopper(s) could result in a volume loss for the ground beef category of approximately 3,200 tonnes over a 12 week period.

Pork sausages have also seen a significant increase in average price per pack over the last 12 weeks (+10%), but they appear to be more resilient as they are already a cheaper MFP option. In economic terms, the demand for pork sausages is less elastic and consumers are less sensitive to any price increase. Cheaper PMF products are likely to be less price elastic, as there are fewer opportunities to cut prices or switch to cheaper options. However, if the average price per package were to increase by another 5%, another 4% of buyers could be lost. Using the same assumptions as for ground beef, this loss of buyers could result in a loss of volume for pork sausages of approximately 1,500 tonnes over a 12-week period.

Lamb roasting saw a relatively small increase in average price per pack year over year, at just +1%. It therefore recorded the smallest drop in buyers not wanting to pay the average price. This example highlights the complexity of predicting price responses for particular food commodities. Different consumers react differently to price increases, depending on their personal circumstances. Lamb is a relatively expensive protein and therefore is less price elastic due to the buyer profile of lamb consumers. However, even these relatively affluent consumers will respond, albeit less dramatically, to price increases. This is reflected in the analysis which shows that the amount consumers are willing to pay is limited. If the average price per pack were to increase by 5%, 6% of buyers might not be willing to pay the new price. If we assume that every buyer spends equally and these buyers leave the category, this loss of buyers could result in a loss of volume for roast lamb of around 200 tonnes over a 12-week period.

Among dairy products, cow’s milk has seen by far the fastest increase in average price per pack (+32%). The reasons for this are explored in our article on how cow’s milk remains the best value compared to alternatives. However, many buyers are still willing to pay the average price or buy smaller packages to mitigate. We know that dairy products, and in particular milk, are considered a staple in many households and will therefore naturally be tougher than other categories. In economic terms, the demand for milk is less elastic and consumers are less sensitive to any price increase. This is because there are fewer opportunities to trade lower tiers and fewer alternatives. That said, if the average price per pack were to increase an additional 5%, we estimate that an additional 8% of shoppers may not be willing to pay the average price. If we assume that these buyers leave the category and that each buyer spends equally, this loss of buyers could result in a loss of volume for cow’s milk of approximately 89 million liters over a 12-week period. However, we must remember that this analysis is based on past behavior and that due to these record highs for cow’s milk prices and the fact that it is a fridge favorite, these predictions should be treated with caution. They do, however, highlight the risk to the category as a whole, with shoppers having to reduce pack sizes to keep the category affordable.

Yellow Fats also saw a significant increase in average price per pack over the past 12 weeks (+22%) and by far the biggest drop in the number of shoppers willing to pay the average price. This is an example of high price elasticity – consumers are very sensitive to any price increase and respond by trading within the category or leaving it altogether. Over the past 12 weeks, yellow fats have shifted from block butter to margarine as the price gap widens, along with shoppers leaving because they don’t consider it essential. For example, you can choose to remove the butter from a cheese sandwich because it is not a main component, but you cannot remove the cheese. If the average price per pack were to increase another 5%, an additional 4% of buyers might be unwilling to pay and might be lost. If we use the same assumptions as for milk, this loss of buyers could result in a loss of volume for the yellow fat category of approximately 2,800 tons over a 12-week period.

Cheese saw the smallest year-over-year price increase per pack (as supply agreements tend to be longer-term than other dairy categories), at +14%. While shoppers stick around (as mentioned above, cheese is usually a key part of a dairy-based meal), we know people negotiate tiers and stores to make sure they can always stock up on this family favorite. If the average price per package were to increase by an additional 5%, an additional 1% of buyers could be lost. Again, if we assume the same as above, the loss of buyers could result in a volume loss for cheese of around 1,100 tons over a 12 week period.

This analysis gives us an idea of ​​the magnitude of the impact of price increases on the meat and dairy categories. When prices rise, demand inevitably falls, until we find a new equilibrium. The results highlight the continued need for tactical and strategic support to ensure categories stay in shopping carts, as we know that once shoppers leave a category, it’s difficult to win them back.