According to professional services firm PricewaterhouseCoopers (PwC), current trends in volatility are set to continue. PwC agri-food partner Stephen Oldfield said: “Long-term volatility and short-term price shocks in the food and drink supply chain are set to continue. Dealing with volatility in availability and price requires urgent and business-wide commodity risk management, led by the boards of UK food and drink businesses, and a collaborative approach with their major customers to collectively manage the effects of price movement.”
Information gathered from a PwC survey, which was taken at a recent client forum on volatility in commodity prices, showed that only a fifth of those attending had taken significant action against commodity price volatility. The remainder of the 50 executives at the forum said they had not tackled the issue.
Oldfield added: “Companies in the middle of the supply chain need to address what they are doing to manage their exposure to commodity price and availability risk and be able to explain it to their supermarket customers. Together, they then need to reach an economically sustainable solution to the way they do business with each other and not deal with it simply at a short-term transactional level. In particular, in a period of short-term rising raw material prices, failure to recognise these issues could cause suppliers significant economic hardship.
“At the other end of the supply chain, the supermarkets themselves are dealing with consumer pressure for quality and availability at a fair price to ensure they maintain or grow their grocery market share in the new normal of, what is at best, a static market. Product availability, price and quality are an absolute must to retain shopper loyalty and it’s just got more difficult.”
The most important requirements for retailers and their suppliers to succeed in the new “normal environment”, PwC said, is customer insight. Out of the 50 executives polled at the forum, more than 50% agreed that, with product availability, price and quality provided as a given, knowing what customers were thinking was vital. Twenty-seven per cent of the executives believed innovation was the most important thing and 16% thought convenience was more important.
Chief retail and consumer adviser to PwC Christine Cross explained that a shift in power between retailers and food processors had occurred and was leading to increased prices being passed on to retailers.
Cross said: “The volatility in the market has enabled manufacturers to justify price increases, recently seen in the UK with wheat. However, the pressure on retailers to maintain extreme value to keep market share is unrelenting, and in this, the ‘golden quarter’, pricing pressure is particularly keen. Increasingly, retailers as well as manufacturers are having to invest time and resources in understanding and managing volatile commodity prices in order to minimise risk in their businesses.
“The ability to price products correctly and maximise promotional effectiveness, offer genuine insights to the retailers, and knowing what’s happening in the commodity market is key in the current environment for processors. The ability to respond to consumers’ needs for product innovation and convenience also differentiates the winners in this market.”