European food retailers face tough 2006

EU - Declining European food retail performance is set to fall further in 2006 as retailers get caught between consumer demands for cheaper prices and manufacturers demands for greater returns.

New evidence suggests rising production costs and falling retail prices will meet head-on this year to attack fragile profit and loss margins. Only the shrewdest retailers may sustain expected performance levels.

According to leading ratings firm UBS, food sector performance in relation to investment returns declined by 13 per cent last year, accelerating the eight per cent year-on-year performance dips of 2003 and 2004.

And new research shows the sector underperforming by five per cent so far this year, as market pressure converges to squeeze the profits of leading retailers across the continent.

UBS food retail analyst Eric Tibi thinks this environment will change the deflationary trend of last year, perhaps bringing an inflationary 2006.

“This year we might see some inflation, because suppliers are increasing costs. But it will be difficult for retailers to pass this on,” Tibi explained.

“Last year was easier because we just had deflation. This year is a different model, which may lead to inflation and impact badly on profit and loss sheets.”

Either way, retailers will find themselves in a tight spot as they try to negotiate better deals with suppliers and assess whether the containment of price increases is viable.

Source: NutraIngredients