The International Monetary Fund has warned that the global economy is at risk of recession if the Iran conflict persists.
The high price of oil and energy costs could affect the global economic outlook: in its worst case scenario (where oil, gas and food prices spike and remain high into 2027) could see global growth fall below 2% in 2026.
It’s a stark warning: but what does it mean for food and beverage? And how long will it be until high oil prices and energy prices imposed on manufacturers start to trickle down to the goods we buy on shelves? And how will consumers react as a result?
A ripple effect
For most in the food and beverage industry, the disruption from Iran has been less about direct impacts (although there are pressures on some key commodities); and more about the ripple effects along the global value chain.
That can restart cost inflation: at a moment when industry volumes are already fragile and margins under pressure.
Food and beverage manufacturers are having to juggle important questions. Can they absorb the higher costs of production to protect volumes and market share? Or do they have to protect margins and pass these costs onto consumers?
It’s a tricky question, because there’s already not much room to manoeuvre.
“We are in a situation where the consumer is feeling the pressure,” said Bernardo Silva, senior managing director, food and beverage, at global CEO advisory firm, Teneo. “There is very little headroom for price increases.”
Hit on both supply and demand
The closure of the Strait of Hormoz tightened supply of key commodities such as oil and fertilizer.
But, at the other end of the chain on supermarket shelves, there’s also likely to be a reduction in demand from consumers
Higher prices at the pump and rising energy bills add stress to tight household budgets, forcing consumers to cut back on disposable purchases. And it’s simply exacerbating pressure they were already experiencing.
It’s a scenario that’s been seen before: research from the National Bureau of Economic Research shows a consistent pattern. The same situation has played out before: such as during the 2007-2008 oil shock and the 2022 energy spike.
“We look at how consumers have reacted when oil prices have gone to around $100 a barrel, and previous recessions,” said Silva. “And what we see is trading down: people may not buy the top shelf vodka anymore, they’ll trade down between categories. Habit is very hard to break: so the first motion is trading down.
“And this might be where private label gets a boost.”
That’s particularly relevant to categories such as alcohol: which are already under pressure as consumers cut back on luxury spending.
Winners and losers
When gasoline prices rise, households cut back on food away from home, curb discretionary purchases, trade down in other categories, seek promotions more aggressively and shift toward more affordable retail channels.
And that creates winners and losers.
- Premium goods are likely to suffer, with consumers less eager to spend out on these affordable luxuries.
- On the other hand, there’s an opportunity for private label and value brands.
- Larger pack sizes or discounted formats are able to offer better value to consumers.
- Consumers are less likely to spend money on eating or drinking out: hitting purchases in the out-of-home channel
- On the other hand, consumers may increase their spend on at-home entertainment - a trend already seen in the COVID pandemic.
How food and beverage companies should react
Companies must now think about how to adjust their portfolios.
That could mean focusing on value propositions over premium ones, or focusing on putting premium products at more affordable price points (a strategy Diageo has already pledged to embrace).
What is difficult to predict, however, is the timing. In oil, consumers felt the impact straight away: prices at the pump soared as soon as the conflict began. In food and beverage, however, it’s less easy to predict when the effects will trickle down to shelves.
That’s going to vary between business and category: some, like coffee, are already under considerable pressure.
But in others, it will take time for consumers to readjust their habits and reprioritize their spending.
And what businesses need to do is keep up to date with the market and observe what happens at each twist and turn - and be prepared for it.
A sudden but contained shock may call for immediate action to mitigate a particular threat: but the prospect of prolonged disruption may require an overhaul of portfolios around long term changes.
“Think about what the plausible scenarios are,” said Silva. “What plays do you need to run in each situation, and what are the processes for each situation, and the actions you need to take?
“The situation is so uncertain and volatile that the normal rhythm of business can’t keep up with it. You can’t rely on quarterly reviews: the reality is the market is moving much faster.”
