As the world watches in horror at the unfolding Russian invasion of Ukraine over the last few days, the war will only increase pressure on UK retail in an already inflationary environment.
- Russia’s invasion of Ukraine has driven wheat prices to a 14-year high
- Petrol and diesel prices have also reached record highs as global commodities soar
- Consumer confidence has plummeted as shoppers worry about the future
Just days after Russia began its invasion of Ukraine, the ripple effects of the situation are becoming clearer. For UK consumers already facing the biggest fall in living standards since the 1950s, the war will push up global energy prices, drive up commodity prices and put more pressure on consumers at the shelf edge.
Inflation jumped to 5.4% in December, the highest level since March 1992. But the Bank of England predicts it could rise as high as 6% by the spring.
Foreign secretary Liz Truss told Sky News: “There will be an economic cost here in Britain; there will be a cost in terms of access to oil and gas markets. I firmly believe that the British public understands the price we will pay if we don’t stand up to Putin now.”
Having just exited a prolonged period of economic uncertainty caused by the pandemic, what are the short- and long-term effects of this new economic crisis driven by Russia’s invasion of Ukraine?
Food prices
Russia and Ukraine between them account for more than a quarter of global wheat exports. The two nations also account for a fifth of the world’s corn exports and 80% of sunflower exports.
A source from the British Retail Consortium says the UK grows the majority of the wheat it consumes domestically, so does not directly import much from Russia or Ukraine.
However, any increase in global wheat prices would drive up costs at home, “which would not be helpful at a time of already rising inflation and external pressure”.
Over the weekend, UK wheat prices peaked at a 14-year high of £7.16 per bushel due to threats of supply disruptions. This will have knock-on effects for household staples such as pasta and bread.
“Wheat prices could rise further; it’s not far off doubling over the last two years”
Clive Black, Shore Capital
Shore Capital analyst Clive Black says international grain and oilseed stock levels were already low before the invasion.
“That would mean that wheat prices could rise further; it’s not far off doubling over the last two years and clearly is going to add another level of inflation,” he says.
“Wheat is also an important ingredient in the whole livestock industry for animal feed. There could be other knock-ons: a big shortage of sunflower oil will have an impact upon the price for rapeseed oil, olive oil and other cooking oils.”
While food inflation has been tipped to reach as high as 5% by the spring, Black said he wouldn’t be surprised to see that hit “high single-digit territory” later in the year.
One supermarket source said “clearly we can see further economic shocks coming” but added: “It’s not going to be food crisis stations, that’s for sure. If you look at the direct imports we have from the region, it’s a bit of vodka and maybe some fish. You’re not going to see shortages and queues for food.”
Energy prices
The bigger impact on UK retail will be the longer-term effects on global energy prices.
As the West rolls out further sanctions against Russia and the Putin regime, the price of oil has risen – with petrol and diesel prices reaching record highs over the weekend.
As of Monday (February 28), petrol prices in the UK stand above £1.50 per litre, while diesel hit £1.55 a litre.
For Retail Economics chief executive Richard Lim, this is going to have a profound knock-on effect on retail supply chains and operational costs.
“Petrol prices have reached another record high. In a hyper-inflationary market, all roads lead to more inflation with this and all of those additional pressures will feed through to consumers through the supply chain and operating costs.
“What that means is that the least affluent families will be hit the hardest, those who spend a disproportionate amount of income on food and energy.”
All these issues meant that in February Kantar data found that surging inflation was adding £180 to the average household’s annual grocery bills.
The supermarket source says that soaring energy costs have “been a big issue for large businesses” for months and are causing havoc, not just on supermarket shelves but at petrol forecourts, too.
However, they dismissed the idea that increased petrol prices were increasing profit margins for retailers with petrol forecourt businesses.
“It’s just not true. With the cost price increases and the thin margins on the product anyway, prices going up is far more a reflection of the oil price than any margin improvement in UK petrol businesses.”
A final knock-on of rising energy prices is a potential shortage of carbon dioxide, which is used in food and beverage production.
Over the weekend, CF Industries, which triggered a shortage of CO² last autumn when it paused production at two ammonia plants, said “persistence of the current levels of energy costs and product prices facing our UK operations could lead to the continued idling or shutting down of our UK facilities”.
Consumer confidence
The surge in food and energy prices comes at a time of deepening costs for UK consumers, with a scheduled hike in National Insurance likely to be introduced at the same time as public transport fares will spike.
This is reflected in rock-bottom consumer confidence figures published at the end of last week by GfK.
Confidence in February 2022 declined by seven points to -26, the lowest point since January 2021, when Covid-19 was surging across the UK despite the early success of the vaccination programme.
Expectations for the coming 12 months were the biggest area of concern. Consumers’ confidence in their personal finances dropped by 12 points to -14, while feelings towards the general economic situation declined by 11 points to -43.
Lim says: “We’ve just been through two years of a pandemic and now we’re going into a period of war on the European continent that we’ve not seen for a long while.
“There will be people expecting this war to unfold and spiral into something even more problematic, increasing pressure on Nato and the West to become directly involved.”
“The current mood music is going to do very little to make people want to go out and enjoy themselves”
Clive Black, Shore Capital
Shore Capital’s Black agrees, saying “the current mood music is going to do very little to make people want to go out and enjoy themselves and spend”.
New data compiled exclusively for Retail Week by Walnut Unlimited has found that 82% of UK consumers are likely to switch their shopping to value and discount retailers.
Of those shoppers, 80% said they would look to save money on their food shopping by switching to a cheaper grocer.
But customers are not just considering cheaper options for food retail. More than half of respondents (54%) said they are also looking to save money when shopping for clothing, while 40% of health and beauty shoppers are also considering switching to less expensive alternatives.
While the UK’s retail sector is not directly exposed to much in the way of direct imports and exports from Russia or Ukraine, the huge shocks the war is throwing out across the international economy will inevitably put further pressure on consumers.
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