By Robert Kowal
Food inflation is an ongoing concern for consumers and businesses alike, and its impact on consumer choices, behaviours, and outcomes within the food industry cannot be understated.
Canadians have been through a sustained period of food inflation, reaching 41-year highs in 2022. According to Stats Canada, February 2023 marked the seventh consecutive month when the food inflation rate rose more than 10 per cent year-over-year. As of July 2023, it remained stubbornly high at 9.1 per cent, exceeding the national inflation rate of approximately 3 per cent. As a result, Canadians spend more of their hard-earned dollars on food and have less disposable income to spend on other things.
The hardest hit are low-income Canadians and seniors on fixed incomes. Families with lower incomes may struggle to afford healthy food options, forcing them to opt for less nutritious items and impacting their overall health. Food insecurity strains social services, as evidenced by increased Food Bank use. In March 2022, Food Banks Canada reported over 1.4 million visits monthly, of which 33.1 per cent are children. Some reports indicate that 23 per cent of Canadians are eating less, with 1 in 5 skipping meals altogether.
Shifts in consumer choices
As the cost of food increases, consumers adjust their purchasing decisions and prioritize certain types of products over others. Consumers may opt for more affordable alternatives or seek out discounted or sale items. They may also reduce the quantity of higher-priced items they purchase or replace them with less expensive substitutes. Consequently, consumer choices may shift towards lower-cost products, generic brands, or products that offer better value for money. This trend can lead to changes in market demand and potentially impact the sales and profitability of certain food industry segments.
Changes in consumer behaviour
Canadians struggling to stretch their food budgets may engage in more price-conscious shopping habits, such as comparing prices, using coupons, price matching, or participating in loyalty programs. These behaviours can drive increased competition among food retailers and incentivize them to offer more attractive pricing and promotions to retain and attract customers.
Higher food prices can also lead to meal planning and preparation changes. Consumers may opt for more home-cooked meals instead of dining out, increasing the demand for grocery store products while negatively impacting the food service industry. Similarly, consumers may shift towards buying foods in bulk or seeking cheaper protein and fresh produce sources. With the recent rise in purchases of local foods and visits to farmers’ markets, people are bypassing the grocers altogether. These behavioural changes can significantly influence the food industry, shaping demand for specific products and altering supply chain dynamics.
Economic outcomes for the food industry
The inflationary impact on the food industry goes beyond changes in consumer choices and behaviours. Food producers and manufacturers must grapple with higher input costs, such as raw materials, energy, transportation, and labour. These cost pressures may necessitate price adjustments as a means to maintain profitability, leading to potential consumer resistance and competitive pressures.
Moreover, food manufacturers and grocers are challenged to balance price increases while maintaining customer loyalty. Passing on increased costs to consumers may seem obvious, but it can lead to reduced sales volume if consumers opt for lower-cost alternatives. Sylvain Charlebois, director of the Agri-Food Analytics Lab at Dalhousie University, says the single biggest reason for food inflation remaining so high is that retailers have been gradually passing along wholesale price increases from their suppliers.
“They can’t just pass along those wholesale increases all at once. There’s a limit to what consumers will pay,” said Charlebois. “They’re already selling less food right now.” Therefore, manufacturers may need to explore strategies such as cost optimization, supplier negotiations, or value-added offerings to mitigate the impact of food inflation.
Government and policy implications
High food inflation rates can also prompt government intervention and policy considerations. Policymakers may focus on implementing measures to address the underlying causes of food inflation, such as improving agricultural productivity, enhancing supply chain efficiency, changing tax structures, or promoting greater competition. Social assistance programs, such as food subsidies, access to food banks, or assistance for vulnerable populations, may be expanded to alleviate the burden on low-income households.
For example, on July 5th of this year, 11 million low- and moderate-income Canadians and families received their new, one-time Grocery Rebate. This targeted “inflation relief” for Canadians provided “eligible couples with two children up to an extra $467; single Canadians without children up to an extra $234; and seniors with an extra $225, on average” (In my opinion, the rebate mentioned above will provide little relief for those in need).
These interventions can have far-reaching implications for the food industry, influencing market dynamics, regulations, and competitive landscapes.
Food inflation in Canada, which remains stubbornly high compared to national inflation rates, has significant implications for consumer choices, behaviours, and outcomes within the food industry. It prompts shifts in consumer choices, leading to a demand for more affordable alternatives and greater price consciousness. Consumer behaviours change as individuals adjust their meal planning and shopping habits to mitigate the impact of rising food prices. Economic outcomes for the food industry are influenced by higher input costs and the need to balance profitability with consumer expectations. Lastly, government intervention and policies may play a role in addressing the challenges posed by food inflation.
Understanding and adapting to these dynamics is essential for businesses in the food industry to navigate the changing landscape and meet the evolving needs of consumers.