ING: High inflation can hinder sustainability in supply chains

Due to the legislation, food companies must do more in the coming years to improve working conditions in international supply chains and limit environmental damage. At the same time, there is a lot of pressure from buyers to keep prices low and thus limit inflation for consumers. This creates a dilemma in the short term and may hinder investment in improvements in chains, but due to the upcoming legislation and social pressure on companies, such investment is often necessary, writes ING Research.

Due to the large diversity of companies and supply chains, the task for one food company is much greater than for another. The task is greatest for the estimated 500 to 1,000 medium-sized and large producers and traders, who have a large number of suppliers and purchasers across several continents. This is stated by ING Research in the new Food & Agri sector survey.

Consumer demand for more sustainable foods has grown in recent years, and companies are paying more attention to how their supply chains work. With a market size of 8 billion euros, the cost of more sustainable food has more than doubled in five years, and these products account for a market share of almost 15 percent of total food costs. In addition to consumer demand, companies also have other reasons to set higher sustainability requirements for the products they buy. Ceel Elemans, ING Sector Banker Food: “This is happening, for example, because of goals in their sustainability strategy, customer demand, the desire to reduce reputational risks, or because of new laws and regulations.”

High inflation

Food prices in April were more than 8 percent higher than a year ago, the sharpest increase in 20 years. Farmers and food producers mainly have to deal with higher costs for raw materials and energy and pass this on to their customers where possible. At the same time, supermarket chains indicate that they keep a close eye on purchase prices. Because price plays a very dominant role in the current contract negotiations, ambitions to make chains more sustainable can be jeopardized. Due to the rising prices of food and the cost of living, consumers may also be more likely to opt for a common alternative instead of a certified product.

Legislation

New European guidelines and national legislation make companies more explicitly responsible for their procurement and production methods. Companies are expected to identify risks in their supply chains and to counteract any negative consequences of their actions such as underpayment or environmental damage in their chains. Initially, the legislation is primarily aimed at large companies, but they also meet the demand of their large and small suppliers. Such legislation will affect companies’ choices, but due to the time it takes to implement and translate into business practices, it will take a number of years before this is fully implemented.

Complex supply chains

The task of mapping chains and possible risks is much more manageable for one food producer or retailer than for another. In the food sector, the challenge is greatest for companies that import from countries outside Europe and also buy from a large number of suppliers. What makes it extra complex is that these suppliers sometimes buy from thousands of individual farmers. It is estimated by ING Research that there are around 500 to 1,000 medium-sized and large Dutch food producers and retailers belonging to this group and dealing with very complex supply chains.

Ceel Elemans, “In addition to the 500 to 1,000 companies, there are also many smaller companies that also buy internationally, for whom it is difficult to take action due to the limited influence they can exert and their need for specialist knowledge. For them, the solution lies more in working together, for example through initiatives in a trade association ”.

Cost benefit analysis

Due to the focus on supply chains, food companies need to weigh up where their chain responsibilities extend and how they can meet this. “That assessment is hampered because concrete financial costs are offset by a number of less tangible benefits, such as the value of more intensive collaboration with suppliers,” says Ceel Elemans.

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