Low food inflation tightens squeeze on Europe's grocers

Thu Nov 27, 2014 11:10am EST
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By Emma Thomasson and James Davey

BERLIN/LONDON (Reuters) - Subdued food price inflation in Europe is unlikely to pick up any time soon, adding to the pressure on mainstream grocers as they struggle with changing shopping habits and competition from discounters.

Prices paid in Europe for fast-moving consumer goods rose at their slowest pace since 2010 in the third quarter, and fell in Spain, France and Italy, according to consumer data firm Nielsen, weighing on retailers' revenues and share prices.

The cost of fresh fruit and vegetables in particular has tumbled due to bumper harvests, a surplus caused by Russia's ban on food imports from the West, currency effects and fierce competition among grocers, stoked by the advance of discounters.

Falling inflation has laid bare problems supermarkets were already facing as shopping habits shift. After decades investing in large out-of-town sites, grocers are struggling to adapt to more fickle consumers, who like to hunt for a bargain while also demanding more convenience stores and online shopping.

"For a few years, those underlying challenges ... were partially masked by inflation which meant (grocers) still had absolute top line growth," said Will Hayllar of OC&C Strategy Consultants. "As that inflation has stabilized, the true picture of what's going on beneath has become more apparent."

There is little sign of imminent relief, especially as oil prices -- a key input cost for farmers -- have dropped by a third since June, although potentially easier monetary policies and a weaker euro and sterling could help rekindle inflation.

"Harvests this year have been pretty good. So you would expect that deflationary environment to exist for at least the next 12, probably 18 months," Mike Coupe, boss of UK grocer Sainsbury's, said in a recent results presentation.

Low food inflation is toughest for mid-market players such as France's Carrefour and Britain's Tesco as it makes it harder for them to pass on rising wage and rental costs to shoppers, squeezing their profit margins.   Continued...

Fruit and vegetables are seen for sale in Soho's Berwick Street Market in central London May 17, 2011. REUTERS/Paul Hackett