SUNDAY TIMES - Brexit means milk is a bargain but dental floss costs you
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Sunday Times Business By Bloomberg, 2017-04-16 00:00:00.0

Brexit means milk is a bargain but dental floss costs you


Image: iStock

British grocers are finding creative ways of passing on Brexit-induced cost increases to consumers. If you are shopping for candles or light bulbs, buyer beware.

Unable to raise prices of staple goods from milk to Marmite because of tough competition from discounters and watchful tabloid newspapers, supermarket operators such as Tesco and Wal-Mart Stores's Asda are ratcheting them up on less frequently purchased goods such as dental floss, whose costs might not register as readily with shoppers.

"Milk is the sort of item that shoppers use to build their price image of a retailer," says Cheryl Sullivan, chief marketing and strategy officer at Revionics, a software firm that helps stores with pricing strategies.

"But shoppers are only price-sensitive on a fraction of a retailer's range."

The UK imports almost half the food it eats, and despite grocers holding firm on key lines, the effects of sterling's Brexit-driven slide are filtering through to shopping bills.

Prices for food and drink rose 1.2% in March, the most in three years, the Office for National Statistics says.

Targeted increases have joined "shrinkflation" - decreasing product sizes while holding prices steady - as a way for retailers to disguise inflation after the pound's fall put upward pressure on costs.

Grocers such as Wm Morrison Supermarkets have said they are unable to pass along the full effect, but retailers are trying to protect profit margins by eking out increases where they can without sending shoppers packing.

Retailers have not dared to tinker with the cost of milk, which costs £1 for a 2.3-litre carton at all of the UK's major supermarkets. Yet the price of decorative candles rose 29% from October to end-March, while light bulbs were up 19% and dental floss 17%, according to independent price checker MySupermarket.com.

"If a retailer raises the price of milk, they won't just lose that sale, they'll lose the whole basket," says Steve Dresser, director of consultancy Grocery Insight. "Retailers have to pick their battles on price."

Research suggests grocers are right to be careful: 52% of Britons are more worried about the cost of day-to-day items than they were a year ago, according to a Barclaycard survey. Nearly three-quarters cited a more expensive weekly shop as reason.

Grocers run sales and loyalty-card data through price-optimisation software to help them figure out which prices they can increase without alienating shoppers. Revionics says it has seen an increase in demand from UK retailers since the country voted to leave the European Union.

Retailers typically order their ranges into products that drive sales and those that contribute to profitability, Sullivan says. Shoppers pay careful attention to the cost of frequent purchases, but are less vigilant about occasional splurges, making it easier to increase prices on those goods, she says.

Morrisons announced temporary price cuts on staples such as potatoes and fish sticks in January. But the company recently increased the price of ground pepper by more than 10%, according to MySupermarket.com.

Varying prices in this way taps into consumers' imperfect perceptions of value, says Ivo Vlaev, professor of behavioural science at Warwick University. Shoppers are concerned with the number of products on which they think they're getting a good deal, not the total amount they spend, says Vlaev.