Food sector growth attributed to higher food prices… not higher volumes

Growth in the food sector is thanks to higher food prices, not higher volumes, according to a new analysis. This as the fast-moving consumer goods sector achieving growth of 13.4%, largely driven by higher prices and not consumption growth.

The cooking oil price surge also created a knock-on effect on consumption patterns. 

State of the Retail Nation: Fast-moving consumer goods sales

According to NIQ’s latest State of the Retail Nation analysis, which presents a more focused picture of food inflation, interesting shifts are shaping the South African fast-moving consumer goods (FMCG) sector.

The sector which includes liquor and tobacco, is now worth R593 billion in annual sales (to end March 2023). This equates to an increase of 13.4% on the previous 12 months.

Stark reality of food inflation

“However, it is important to understand that the overall growth we calculate is the combined increase in value [rand sales] and volume [units sold]. The stark reality is that this ‘real’ growth is primarily driven by price increases and not organic consumption growth,” Steve Randall, commercial lead of NIQ South Africa’s consumer panel, says.

He also points out that CPI is often overrepresented and sometimes misunderstood when conducting a robust analysis of the real impact of food price increases.

“Overall inflation is currently sitting at 6.3% [down from 6.8% in the previous month] and as a result, people say it is cooling, but food inflation is still sitting much higher at 12.2% and has only started to normalise in April/May of this year.

“The Stats SA food inflation figure has wide recognition in the market and is a useful measure, but it can only realistically look at a subset of items and observed prices at a point in time.”

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Cooking oil saw highest food price increase over past 12 months

NIQ, on the other hand, uses barcode level information across the widest coverage of the market gathered from its vast retail measurement from scanned barcode data at 10 000 modern trade stores, coupled with a statistically representative panel of traditional trade stores which covers 100 000 FMCG products.

NIQ uses this richest possible dataset for a robust analysis.

“We use item-level data to calculate inflation and consider items sold last year and this year. Due to our granularity, we use a naturally weighted basket [not a statistically estimated basket], which results in a more accurate view.”

Using this focused approach, NIQ conducted a thorough analysis of the inflation pressure areas of FMCG during the last 12 months.

“Unsurprisingly, cooking oil experienced the highest rate of annual inflation with a 40% increase and remains the biggest contributor towards overall net FMCG inflation, contributing a 7.2% ‘share’ of inflation although it accounts for less than 2% of total sales.

“Interestingly, the full effect of these massive cooking oil price increases created a change in consumer consumption patterns around it.

“In response to the price increases, volumes bought dropped steadily over the last three quarters, an indication that despite its essential nature, consumers are curtailing their use.”

The analysis shows that the steep price increases also had knock-on effects across the consumption chain, given that it is also a complementary product to frozen chicken that also became more expensive which means the cost of what could have been considered a staple meal, chicken cooked in oil, has drastically increased.

However, the price of cooking oil stabilised over the past three months and the NIQ team expects inflation to ease in this product category and more broadly across the range of Top 40 products it measures.

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Higher food prices make consumers find alternatives

Randall expects consumers to continue strategising in the short term and find alternatives, such as pork, which is now comparably priced to frozen chicken or tinned protein which offers a longer, more cost-effective shelf life compared to frozen protein.

In the same way, rice can also be considered a better alternative to maize meal, which experienced a 17.6% annual increase compared to the inflation for rice which is at 1.0%.

“It is important to note that increased promotional intensity, coupled with increased promotion seeking from consumers, does bring down the level of inflation in a particular category. This is evident in a category like rice, while a category such as coffee has seen high inflation (15.5%) due to decreased promotion and higher everyday prices.”

What does the future holds?

What about the future of food prices? Randall feels resilience can be built into manufacturer and retailer strategies despite the uncertainty around loadshedding and the spectre of continued increases in the price of diesel.

“We continue to advise our clients on key ways to combat current consumer constraints by asking how their products can be offered as solutions to basic problems like food price increases and meeting this need with innovative but responsible pricing strategies.

“In addition, digging deeper into traditional trade [independent] retail channels that are yielding better volumes than many modern trade outlets at present, is also recommended as a key option to consider.”