When will food volume growth pick up again?

28 August 2024

Household real spending on food and drink fell over 2022-23

The ONS has issued the latest edition of its long-running Family Spending report, which provides detailed information on how UK households allocate their budgets.

According to the data, average household spending on food and drink rose very slightly between 2021-22 and 2022-23, but this was driven by powerful inflation.

In real terms, with inflation accounted for, spending actually fell, across all household income groups. Households with the highest incomes cut back most aggressively.

Lower income households cut back less, but they were presumably already managing all spending very closely and therefore had little leeway to go further.

This ties-in with findings from IGD’s ShopperVista surveys, which show that shoppers across all income groups responded to inflation by seeking ways to reduce food spending, often reducing the amount purchased.

This behaviour is also reflected in IGD’s research on UK grocery retail performance, which shows a real terms reduction in market size over 2022 and 2023. 

What’s happened since?

The ONS data just published is now about 17 months out of date. However, other sources such as Kantar suggest that total volume demand for food and drink stabilised in late 2023 and early 2024.

Volumes are now recovering, although only very slowly.

There is, however, still some way to go before market demand recovers to pre-Covid levels, in spite of rapid population growth, which tends to increase the requirement for food.

Volume weakness was previously concealed by strong food price inflation but, with inflation now back within the normal range, the true situation is revealed and driving volume recovery is a priority for businesses.

Where to look for volume recovery?

ShopperVista research shows that shopper confidence is picking up, slowly, and that the most affluent households are - unsurprisingly - leading this movement.

James Bailey of Waitrose has recently discussed this, noting an increasing willingness to spend more and trade-up, at least amongst the company’s target customers.

For food businesses in search of volume gains, focusing on more affluent households may be attractive – these households cut spending most during the inflation spike but may now be willing to spend more once again.

According to the Family Spending report, the most affluent 10% of households spent £88.90 per week on food and drink in the latest year, compared with £35.40 per week for the least affluent 10%.

Encouraging the most affluent to spend, say, 5% more per week would yield an extra £4.45 per week or £231.14 per year for businesses.

A similar 5% uplift from the least affluent would be worth only £1.77 per week or £92.04 per year – and this would likely be much harder to achieve from shoppers that must still watch every penny.
 
This tactical opportunity may be fleeting, however – the long-term future for household prosperity remains unclear.

Benefit cuts and tax increases may threaten future spending power and confidence even for the apparently well-off. The Prime Minister has already warned voters to expect “painful” decisions in the next Budget.

The long-term view

The Family Spending report allows us to take a long-term view, going back to the turn of the century (further for anyone willing to wrestle with hard copy reports).

Although average total household spending on food and drink has risen steadily since 2001-02, with a spike during Covid, the benefit of this has been entirely deleted by inflation.

In real terms, spending the year before Covid was barely more than it was 19 years previously and it is lower in the latest year.

This is disappointing and frustrating, especially in view of the evolution of food and drink retail over this period, with huge investment in loyalty, products and service..

This may be due to pressure on household budgets from other categories such as housing, utilities and motor fuel. Higher costs in any of these areas might force shoppers to spend less than they wish in food and drink.

This leaves UK food and drink businesses reliant on increases in the population and household numbers as a source of real growth, with little benefit coming from trade-up.

This position is reflected by IGD’s latest forecasts for the future of food retail (available to Retail Analysis subscribers).

It also means that, whilst restoring real spending on food to pre-Covid level is a realistic objective, driving it beyond that point may be extremely difficult unless the overall economic situation improves.

The real issue

Even before Covid, total UK household expenditures had been more-or-less unchanged for the last twenty years or more, once inflation is accounted for (see chart).

This finding supports findings from the Department for Work and Pensions Households Below Average Income study, which shows that real incomes have also flat-lined, at best, for several decades. With incomes flat, spending is also flat.

An optimist might take the view that static household prosperity is quite remarkable, given the series of shock events that the UK has endured over recent years, including the Credit Crunch, EU Exit and Covid.

More pessimistically, the sustained effort to drive national prosperity through policy - incentives for investment, support for training and infrastructure improvement - have not really delivered gains at household level. They have, at best, held prosperity steady through turbulent times.

IGD opinion

The new government has promised to turn the economy around and deliver better results for households, but it will need to deliver something spectacular and different in order to out-do the efforts of its predecessors. 

In any case, we have been warned that the project will likely take a decade or more – a quick recovery in the economy and a quick recovery in food demand both seem unlikely. Slow, steady progress seems more realistic.

So, when will volumes for food and drink pick up again? 

Volumes are starting to pick up again but are still below the pre-COVID level. We can envisage a return to pre-COVID levels of household demand, but growth beyond that point will depend on the ability of the government to deliver sustained improvement in household prosperity. As the Prime Minister has recently said, this will be the work of years.