Falling oil and raw material prices as well as pressure from discounters will lead to a significant easing in grocery prices throughout Europe in 2009. This is one of the key conclusions to be drawn in a report just published this week by Verdict Research, part of the Datamonitor Group.

The research also highlights that the downturn will subdue retailer plans for mergers and acquisitions, format diversification, international expansion and will put a stop to sales and leaseback deals. Meanwhile the recessionary environment and financial crisis have dented sales of organic goods.

Last year was a very good year for the European grocery sector, according to Verdict, with most growth driven by inflation due to exceptionally high oil prices and agricultural raw material price increases. As prices rose, grocers reported healthy top and bottom line figures. And with food price inflation at unprecedented levels, retailers could prop up their cash profits, as a result the European grocery market grew to €901.5 billion (£814bn) in 2008.

However, the high food-price inflation and oil price trends have both reversed Verdict Research believes that these in combination with the discounter threat will lead to lower prices in grocery across the EU in 2009.

Daniel Lucht, European retail analyst at Verdict research and co-author of the report said: “While grocers are to a certain extent insulated against the downturn that is severely hurting the rest of the retail sector, the effects of the credit crunch and the onset of the global recession will still be felt across the European grocery market. Real estate bubbles have burst, credit availability is curbed and unemployment is rising again. As a result, customers have become cautious. The result has been an overriding focus on value from a consumer’s point of view.”

Not surprisingly, the price increases that growers would like to see pushed through will be extremely difficult in the economic environment.

Several grocers have suffered declining sales growth of their organic ranges as customers feeling the squeeze struggle to pay the premium charged for these products, although Verdict believes that this could be one of the first sectors to bounce back as it has identified opportunities in the marketplace in ramping up private label development, gaining more efficiencies in buying and supply chains, cutting unnecessary costs, lateral diversification and in green retailing. Simon Chinn, co-author of the report concluded: “Retailers with the necessary financial muscle should not let this crisis go to waste without emerging far stronger from it.”

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