Economics is a universal science, affecting us all. The last three years have demonstrated that none of us can stand aloof from either the financial markets or economic change generally.

So, with this in mind, what are the three central economic and strategic issues which will affect UK grocery businesses over the next decade or so?
 

Food Security

The last few years have provided a stark reminder that, even in the UK, the availability and affordability of food cannot be taken for granted.

The government has, therefore, been devoting considerable effort to investigating this issue and now defines food security in these terms: “ensuring the availability of, and access to, affordable, safe and nutritious food sufficient for an active lifestyle, for all, at all times”.

The UK’s current position is fairly strong because we benefit from efficient agriculture.

We also have enough wealth to buy what we can’t grow for ourselves from open global markets although this involvement in global markets can create uncertainties and risks which are not always easily addressed – for example, exposure to extreme climate events and trade disputes.

A recent investigation by DEFRA highlighted the threats to UK food security posed by increasing pressure on global food resources. The following table is based upon this study – a more comprehensive version can be accessed here.

Green indicates favourable situation, amber indicates unfavourable or uncertain, and red indicates very unfavourable. Question marks are in the original document.

Some of these issues are, of course, outside the remit of UK food businesses and most are not in a position to individually affect, say, global fish stocks, but, as a group, UK businesses will be influential, especially as they extend the scope of their global operations.

The UK’s ability to cope with possible disruptions to global supply (known in the jargon as “resilience”) is limited by changes in supply chain practice over recent years, with stockholding within the supply chain now at low levels, especially amongst downstream participants.

In the same study DEFRA expressed some concern over the high energy intensity of current supply chain arrangements which may compromise food security in the UK.

	Sustainability extends to ensuring food security

Notice the relatively short time horizon of the DEFRA study – just ten years - which is sufficiently near at hand to be relevant to long term planning by government, businesses and individuals.

Plainly, food security, on both a global and a UK basis, is an issue which all food companies should have an understanding of and should be actively addressing.
 

Food Sustainability

Food security is one aspect of the wider question of supply chain sustainability.

Food 2030, published this month by DEFRA (click), outlines the government’s sustainability objectives for the food industry as a whole:

• Encouraging people to eat a sustainable, healthy diet
• Ensuring a resilient, competitive, profitable food system
• Increasing food production, in a sustainable fashion
• Reducing greenhouse gas emissions from food production
• Reducing waste and maximising use of waste as a resource
• Investing in skills and technology

In each area, Food 2030 outlines the challenges and offers a view of what “success” will look like; in other words, it explains what must be achieved in order to cope effectively.

The document also lays down a “roadmap” for meeting these goals, setting out what is expected of government, businesses, researchers, voluntary bodies and shoppers themselves, with various measures being specified for gauging progress.

This is an area where enormous progress has already been made over the last decade but the task is still less than half complete and companies will be redoubling their efforts. A clear government strategy will be welcomed by companies because it gives greater certainty for planning and is a unifying force.

A new party in government would doubtless lead to some changes in the strategy but there’s a strong chance that the core will remain, based as it is on the latest scientific evidence.
 

Government debt rose to 59% of GDP in Q3 '09

Government Debt

Management of public finances is likely to be the single most important issue in the forthcoming general election campaign and it will also play a role in steering the policy of whichever governments emerge throughout the new decade.

Government debt has escalated rapidly over recent years, moving from 36% of GDP in Q3 2006 to 59% in Q3 2009. This is expected to move up to 78% by 2015, before falling once more. (It should be understood that official measures of debt provide an incomplete picture of the scale of the Government’s financial commitments).

Many other governments, including leading EU partners, have accumulated far higher levels of debt relative to GDP but even so, the UK situation has particularly concerned investors. There are various reasons for this:

• The pace at which debt has been taken on. Much of the fresh debt was in order to help support banks at the height of the Credit Crunch – an event which was hopefully a “one-off” - but now much of it is being used to fund routine government spending as receipts fall due to recession
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• The lack of concrete plans yet for paying off debt
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• The need to wind down before long the Bank of England’s programme of quantitative easing (QE) used to buy back gilts from investors - this has been greatly supporting the market for new gilt issues

Agencies such as Moody’s have already warned that the UK’s credit rating might be revised downward if clear plans for reducing debt are not in place post election and the IMF has also expressed concern.

The need to rebuild finances will mean a combination of tax rises and spending cuts spread over a long period of time. The grocery sector will not escape from increases in income tax, VAT, duty, NI and perhaps even entirely new taxes.

A tough and challenging period lies ahead but at least, unlike a couple of years ago, most people are prepared for this now.

Similarly, cuts in expenditure may result in job losses in the public sector and the cutting or freezing of social payments. Both would lead to reductions in consumer spending power, with some locations being affected more than others.

Grocery continues to demonstrate its credentials as a “defensive” sector, but even grocery businesses will face ongoing challenges in maintaining growth momentum and margins in these conditions.

So, a tough and challenging period lies ahead but at least, unlike a couple of years ago, most people are prepared for this now. Expectations are very different from the start of the previous decade but if we apply our full ingenuity to the current set of problems then we could be feeling much more optimistic again in ten years’ time.
 

More information:

	The Food Grocery Monitor - Issue One Arriving February 2010 As economic reconstruction gets underway, grocery businesses need to maintain their strategic awareness and insight. The Food & Grocery Monitor will help you prepare now for the marketplace of tomorrow by providing detailed up-to-date research on grocery industry and economic developments.

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James Walton is IGD's Chief Economist. He is responsible for original research, speaking at events, writing articles and reports, including IGD's Quarterly Economic Update series and forthcoming Food & Grocery Monitor series, and delivering training at the post-graduate level.

James is IGD’s leading author on issues relating to the convenience sector, including consolidation and future forecasting. In his 10 years at IGD he has authored or co-authored over 50 publications.