We have two predictions today from Justin King, the ex-Sainsbury’s chief executive. One is that food prices are going to rise by some 5% as a result of Brexit and the subsequent fall in the pound. The other is that there’s going to be the collapse of one of the food retailers as a result of pressures upon margins. The problem with these predictions is that it’s entirely possible to see either one happening but it’s very difficult to see both happening at the same time. They’re not quite mutually exclusive but the thing which causes the one is the thing which will at least reduce, if not quite entirely prevent, the other.
For, if there is great pressure upon retailers’ margins then they won’t be able to pass on the full increase in the sterling price of food as a result of the collapse of the pound.
Still, we’ve got the man saying it:
Supermarket shoppers will be hit by price rises of at least 5% over the next year, the former head of Sainsbury’s has warned.
Justin King blamed the plunge in the value of the pound since Brexit for creating a “profound change” for food retailers.
The calculation is simple enough. Some 50% of what the supermarkets sell is imported, the pound has fallen raising sterling costs by 10% on those imports, thus the general effect will be 5% inflation. It does have to be said that that’s not exactly how it works. There will be some import substitution as domestic production now becomes cheaper than imports. How much no one knows, no one can really know in fact, but that will mitigate somewhat. But then there’s the second claim:
Former Sainsbury’s CEO Justin King said the fall in the value of Sterling has created a ‘profound problem’ and warned the worst was still to come.
In an interview with Newsnight, Mr King also predicted a major retailer will ‘disappear’ as even the most established names struggle to cope.
For:
He believes we may not see the full impact of the weak pound for another year, but said it would make the UK grocery market even more competitive than it already is.
“Businesses that are already stretched, perhaps with lower margins and less strong relationships with customers – they are the ones that are going to suffer because they will be squeezed in the jaws of not being able to pull up prices, while costs continue to increase,” Mr Wright said.
But if you cannot put up prices to deal with cost increases then we’re not going to see the cost increases passed on and thus we’re not going to get the retail inflation. I can quite easily see one or the other happening, retail inflation or a further squeeze on retailers’ margins. And I just have terrible trouble in seeing both happening at the same time.
Of course, we should also note that this isn’t terribly important. Yes, obviously food is important. But food is also some 12% or so of a modern family’s budget, the lowest it has ever been in the history of our species. And a price rise (or not) of 5% in 12% of the budget is a change of just over half of one percent in that family’s standard of living. Something that’s interesting but not of cosmic significance.
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