Fierce Supermarket Competition Keeps Lid On UK Food Inflation

Expectations of a sharp acceleration in UK food inflation following the latest surge in energy costs have so far failed to materialise, with intense supermarket competition and tighter cost management helping retailers and suppliers to absorb much of the pressure.

The food industry warned earlier this year that higher energy costs linked to the conflict in Iran could drive food price inflation up to 10% by Christmas. 

Instead, annual inflation for food and non-alcoholic beverages slowed to 1.7% in June, down from 2.2% in May, representing its lowest level since August 2024.

The June figure was also well below the Bank of England’s 3.6% forecast for the month, and far short of the over 9% increase that had been anticipated by the Food and Drink Federation (FDF) for December.

Fresh Food Pricing Remains Competitive

For the fresh produce sector, the resilience of retail pricing is particularly significant. 

Fresh and chilled categories are among the areas where supermarkets compete most aggressively for shoppers, which makes retailers reluctant to pass on every additional cost to consumers. 

Tesco, Sainsbury’s, Asda, Morrisons, and Marks & Spencer are continuing to compete with Aldi and Lidl for increasingly price-conscious shoppers, which is limiting the scope for retailers to pass on the full impact of higher operating costs.

Clive Black, head of consumer research at Shore Capital, said supermarkets had accepted some pressure on profitability to keep fresh and chilled prices competitive because those categories can influence where shoppers choose to spend. 

“The single biggest factor behind food inflation not progressing as strongly as we thought is the competitive intensity of the industry,” Black said.

As such, Black expects to revise downwards the food inflation forecast he made in May.

Retailers have intensified their battle for market share, while food manufacturers and other suppliers have adapted after being caught out by the rapid inflation that followed Russia’s invasion of Ukraine. 

More businesses are now securing energy and ingredient costs further in advance, reducing their exposure to sudden movements in commodity and input prices.

At the same time, retailers and suppliers have pursued cost-saving programmes to counter higher labour, tax, and regulatory expenses.

“There’s lots of things going on to manage cost push inflation and keep a lid on the price that the consumer sees on the shelf,” explained Kunal Kothari, a fund manager at Aviva Investors, which holds stakes in Tesco and Sainsbury’s.

Competition Across The Board

The UK’s highly competitive grocery market appears to be one of the strongest forces restraining food inflation.

That competition is evident across the market, from the mainstream supermarkets to the discounters. 

Recent market-share data illustrates the pressure. 

Worldpanel by Numerator data indicates that Tesco’s market share dipped in June and July, marking its first consecutive declines since July 2023. 

A weekly pricing survey carried out by The Grocer also reinforces the intense competitiveness. 

Each of five major supermarket groups has reportedly been the cheapest retailer at some point during the trade publication’s past 15 surveys.

Source: Reuters