Food consumer goods : "The Cake Has Stopped Growing !"

Organized by Nomadia, the Sales Force Morning event on October 12th delved into the analysis of the consumer goods market and the challenges faced by players in the food industry, given the backdrop of declining sales. Relive the event that highlighted the trends to consider for approaching 2024 with the right strategy !

An uutlook marked by inflation

Yes, general inflation is slowing down. It is expected to continue receding in 2024, stabilizing around 2.5% in 2025 according to the Bank of France. However, consumption is not picking up. It is even at its lowest, both in value and volume, in the food sector where prices have increased by more than 20% in 2 years: on a basket of 150 “star” food products, the receipt has jumped by 26.6% between February 2022 and July 2023 (source A3distrib – Nielsen IQ). Meanwhile, salaries have only increased by an average of 4.5% (Insee), with a decisive sociological consequence for manufacturers and distributors:

“Food inflation leads to downgrading since there is indeed a decrease in the purchasing power of the French. Beyond the statistical reality, it is the consumers’ perception that produces this sense of downgrading, which in turn produces the observed changes in purchasing behavior in stores.”

Olivier Dauvers

Faced with the erosion of their purchasing power, households adapt by making decisions at three levels:

>> Arbitration between retailers, turning to those with the best price image. This explains the growth of E. Leclerc, whose market share in value has been increasing by more than 1% per month since April 2023, “a level of growth that we have never seen in over 30 years over such a long period.”

>> Arbitration on quality, abandoning national brands in favor of private labels (MDD) and then ‘First Price’ to preserve the quantities purchased.

“The move upmarket (organic, brand) was the number one driver of growth for 10 years. In 2023, we are witnessing an unprecedented downgrade for at least 10 years. Private labels increase by 0.9 percentage points in market share, and first prices by 0.6. The two combined exceed 43% market share in the first 3 quarters of 2023.”

Nicolas Léger, Analytic Team Director, NielsenIQ

>> Arbitration on quantity, with a catastrophic impact on volumes which, after the peak of the COVID period, collapse to the 2014 level while, over the same period, annual spending per capita has increased by 13.4% (NielsenIQ).

It should be noted that these arbitrations no longer concern only the most modest households. These households adapted in 2022 and, “almost to the bone,” no longer have much room to maneuver. In 2023, it is the upper middle classes that are reducing their purchases of PGC-FLS, down 3.4% in volume compared to 2022 (NielsenIQ).

A risk of sustainable “deconsumption”?

It is an understatement to say that the term “deconsumption” worries the retail world. The reactions of retailers to the recent campaign by Ademe featuring a “devendor” prove how sensitive the issue is. But there is a notable difference between voluntarily restricting clothing or appliance purchases for ecological reasons and being forced to reduce essential food purchases due to a lack of means. However, a third of the French find themselves in this situation, while 3 out of 4 admit to having difficult month-ends (Apinio/LSA study, August 2023).

In terms of food, if the French are deconsuming, it is because they have no choice. Believing that, with inflation beginning to ease, food consumption will quickly pick up again, is wishful thinking. It would indeed require a drastic improvement in purchasing power through more substantial salary increases and more generous social measures, which is not on the agenda in France for fear of triggering an uncontrollable price-wage spiral.

This price-wage spiral is even less relevant as the existence of a price-profit spiral is becoming increasingly evident and has even been confirmed by the IMF and the ECB. If food prices have unreasonably increased, it is because manufacturers have taken advantage of the situation to restore their margins, especially by not passing on the decreases in prices of food commodities since the summer of 2022. The increases in 2022 more or less reflected the rise in production costs for manufacturers (raw materials and energy) triggered by the Russo-Ukrainian conflict. Those in 2023 are, however, considered unreasonable in light of the profit margins of the agri-food industries, at the highest level in 30 years at 48% (compared to 28% at the end of 2021) (Insee).

It is urgent for prices to decrease !

Contributing half to the food inflation suffered by households, the margins of large companies and large distribution are the cause of this “forced deconsumption” that cannot continue without risk: the risk of social explosion because eating is vital; the risk of sales collapse for the entire sector – manufacturers and distributors – due to a lack of solvent customers…

For food consumption to resume, there is only one short-term solution: food prices must decrease. And quickly ! This is summed up by the strong message Olivier Dauvers addressed to PGC-FLS manufacturers present at the event:

“It would be better for the price decrease to happen, otherwise it’s #yellowvests. And there, the entire sector has a form of responsibility, social and business. I hope you don’t imagine for a moment that demand will stay at the current level if prices stay at their current level.

You will have to find solutions. Otherwise, brands will become luxury products and the brands you represent will no longer be ‘mass market,’ but ‘niche market,’ and private labels will become the heart of the French diet. It must be said: today, there is a form of collective irresponsibility about the price of food.”

However, to stimulate demand, prices must decrease both globally, significantly, and sustainably. Drops of 2 or 5 cents on a few “fixed-price” products may indeed represent an effort for manufacturers and distributors, but they do not and will not make a difference for the consumer at the checkout. However, a general decrease is out of the question. If we stick to the latest statements from the president of Ania (National Association of Food Industries), in 2024 prices should stop increasing, but they will not decrease. Most manufacturers approach annual commercial negotiations with large retailers with increasing prices, which amounts to shifting the price effort onto retailers. The advancement of the closure of negotiations at the end of January on which the government and retailers were counting to lower prices will not produce the expected results…

The elephant in the room

It is entirely logical that inflation and its consequences are at the center of the concerns of consumer goods stakeholders. However, these conjunctural issues should not overshadow longer-term structural trends, crucial for the future of French food retailing and its suppliers. The elephant in the room, the reality that is not taken enough into account, is that general consumption in France has been growing on average by only 0.4% per year since 2008, compared to 2.6% before 2008.

“This means that for 15 years, the ‘cake’ on which you all are – you, supplier manufacturers, and your distribution partners – is no longer growing. When the market grows by 2 to 3% per year, everyone moves forward, even the bad ones. When it only increases by 0.4% as is the case in France for 15 years, it becomes more difficult to stay in the green and easier to tip into the red.“

Olivier Dauvers

The decline in demand is explained not so much by the vagaries of the economy as by demographics: with a natural balance divided by 4.7 between 2014 and 2022 and a number of births on the verge of being surpassed by deaths, the French population is stagnating and aging. The effect on food consumption is as predictable as it is durably unfavorable: year after year, there are fewer new mouths to feed and more elderly people needing less caloric intake. This is why the ‘cake’ is no longer growing.

And yet, despite this reality, large retailers continue to increase their capacities dedicated to food by building square meters, especially for drive-ins; by generalizing Sunday openings; and, due to e-commerce competition, gradually reducing their non-food shelves in stores.

The combination of these three undeniable realities – structural slowdown in consumption, e-commerce development, and increased commercial offer – leads to an obvious conclusion: commercial returns are decreasing, which weakens the very model of French food retailing.

These are quite dark prospects, you might think. But it is not by denying realities that a winning strategy is built and that opportunities are best exploited ! There are indeed opportunities for players in consumer goods who will analyze in-depth consumer behaviors and local potentials. That’s what our analysis and geomarketing tools, as well as our field sales force optimization solutions, are for. Promise: we’ll explain all that in an upcoming post !