J.P. Morgan: European food retail awaits reinflation: El Niño raises costs, but sales volumes remain under pressure in many markets

When could food reinflation appear?

JPMorgan notes that global food prices are still rising more slowly year on year than their historical norm, at 2.5%; but they rose 0.3% month on month in September, and the annualised three-month rate rose from 2.0% to 2.6%.
Latin America and emerging Asia, where El Niño has a greater impact, are driving an increase in emerging-market food inflation momentum. Together with rising energy and transport costs, the bank expects global food inflation momentum to climb significantly towards an annualised rate of around 5%, with the greatest impact on consumer food prices potentially arriving in early 2027.
The bank’s baseline view is that inflation will persist for longer but remain broadly manageable, which would benefit food retailers; the Middle East conflict is raising costs mainly through fuel, transport and some supply chains, with a different scope of impact from the period when food inflation reached double digits in 2022–2023.

UK food CPI rose 1.3% year on year in September, below its long-term average of 2.6% for the fifth consecutive reading; the food producer price index fell 0.6% year on year, a narrower decline than the 1% fall in August.
The recovery in prices has not yet brought faster growth: year-on-year food retail sales growth slowed from 3% in August to 2.1% in September, while volume growth fell from 1.6% to 0.8%. In the four weeks to 4 October, grocery market sales grew 1.0% year on year, also below the 1.8% recorded in the preceding four weeks.
JPMorgan regards the UK pricing environment as broadly rational. A Which? price survey shows that, using Aldi as the benchmark, prices at Asda, Tesco and Sainsbury’s were 17%, 18% and 19% higher, respectively; the bank rates Tesco and Sainsbury’s overweight.

Food prices remain weak in Poland, but volumes have improved. Food CPI fell 0.4% year on year in September and rose 0.1% month on month, its first monthly increase in five months; real food retail sales rose 1.3% year on year in the third quarter, after falling 2.3% in the second quarter.
In the US, slowing inflation has coincided with falling volumes. Food-at-home prices rose 1.81% year on year in September, down from 2.19% in August; food retail sales rose just 0.3% year on year, while volumes fell 1.7%.
US producer prices for finished food products fell 0.92% year on year in September, their third consecutive monthly decline; consumer egg prices fell 20.6% year on year. JPMorgan believes US food retail also faces pressure from welfare policies and intense price competition.

In France, year-on-year food CPI inflation rose from 1.1% in August to 1.5% in September, but food retail volume growth slowed from 4.2% to 3.1%. In the four weeks to 4 October, French grocery market sales grew just 0.4% year on year, compared with 1.2% in the preceding four weeks.
Belgian food CPI moved from flat year on year in August to a decline of 0.4% in September; JPMorgan believes local grocery indicators have yet to turn around and that Colruyt, which has a high market share, faces difficulties defending its share.
Corporate strategies are also diverging: Jeronimo and UK food retailers are investing in prices to maintain competitiveness, while Ahold Delhaize and Carrefour are more focused on preserving margins. JPMorgan is concerned that Ahold Delhaize’s preservation of margins and returns on capital in the US, alongside a corresponding reduction in investment, will harm its long-term competitive prospects, and therefore rates it underweight.