French food prices fall further

Deflation at the retail level indicates food processors could face further pressure on the operating margins, especially if a proposed new law allows supermarkets to promote loss leaders.

In France prices in the food and non-alcoholic drink category fell by 0.8 per cent in July from June, and declined by 0.4 per cent over the year, according to Insee, the government's statisticsagency. The trend toward deflation is increasing as indicated by the three month figure, which shows deflation at 0.6 per cent.

As economic stagnation and low price inflation sets in, western Europe's share of the total grocery market will fall to 45 per cent from the current 53 per cent whilst eastern Europe and theBalkans will increase from to 23 per cent from 14 per cent, IGD Services stated in a report last month.

IGD research indicates that western and southern European grocery markets are becoming increasingly saturated, while central and eastern Europe are emerging as new growth opportunities. Pricepressure, the increasing demand for convenience foods and consolidation of the market are the hottest trends in European retailing, IGD stated.

In France discounters have been eating into sales of the big supermarkets and hypermarkets. For example Carrefour, France's top retailer, is currently engaged in price wars in France, where it isattempting to regain market share from rival chains. As a result margins have fallen.

The latest Insee figures show food prices have fallen by 0.9 per cent for the month and by 0.3 per cent for the year. Prices for non-alcoholic drinks rose by 0.1 per cent during the month and havefallen by 1.9 per cent year-on-year.

In the year to the end of July deflation is occurring in the bread, fish, dairy, egg, oils, fruits, confectionary and spices categories. Meanwhile meat prices have risen by 1.2 per cent andvegetable prices by 2.8 per cent over the year.

Alcoholic drink prices have fallen by 0.5 per cent over the year but remained stable during July.

Over all the consumer price index of retail prices fell 0.2 per cent in July from June, but rose 1.7 per cent year-on-year.

In 2004 Europeans in 39 countries spent a combined total of €1,363bn on food and groceries in 2004, with Germany as the largest market, to be overtaken by Russia in 2020.

Germany currently has the largest food and grocery market, worth €202bn in 2004 but by the end of the decade France will claim the crown in Europe. But the growth will be driven by the non-foodmarket.

France has the greatest concentration of hypermarkets. Growth in the non-food market will drive France's grocery market to become the largest in Europe. The growth will occur even though thecountry is also experiencing low price inflation in the non-food sector. The grocery category includes alcohol, medicine, clothes and other household products.

By 2020, Russia will take over from France by becoming the largest food and grocery market in Europe. The Russia market will be worth €375bn by that time, rising from the current €134bn (seethe separate story on the Russian market in today's edition of FoodProductionDaily.com).

France's market will rise to €278bn by 2020 from the current €196bn. The UK will hold firm in third place with a market worth €264bn, rising from €176bn.

France's recent switch from the Loi Galland to the Loi Dutreil (Dutreil Law) should enable retailers to cut prices on branded food and drink for little extra cost, according to UK-based brewerScottish & Newcastle (S&N). Under the Galland Law, retailers are not allowed to sell branded goods below invoice costs, giving private label an advantage.

But, the current switch to the Dutreil law is set to reverse this rule, and also allow retailers greater scope to use extra funds to fuel price cuts. This could put further pressure on processorsmargins.