Tough times ahead for food retailers

A perfect storm of rising food prices and cash-strapped consumers is likely to mean a very tight 12 months ahead for Australia’s restaurant and café owners, a new report released today reveals.

The report on the outlook for food retailers, prepared by Westpac Bank’s economics group, predicts slow growth across the sector, with sales to rise just 1% in 2008 and 2.4% in 2009.

Looking across the sector, however, it is restaurant and café owners who look set to take the biggest hit. In March alone the restaurant and catering sector went backwards a massive 7.2%, and according to Westpac senior economist Matthew Hassan, things are likely to get worse before they get better.

“Those businesses are feeling the pain right now and it is going to be a difficult year. It is a very tough part of the cycle for restaurant and café owners, and there no simple answers to cope with that,” Hassan says.

The problem facing restaurant and café owners is twofold. On the one hand interest rates rises have caused consumers to stop discretionary spending across the board – for the food sector, that means getting takeaway or cooking at home instead of going out for that fancy meal.

And on the other hand, rising global food and fuel prices are slowly but surely feeding into the Australian market. This has already resulted in price rises of basic food stuffs, but it is likely to feed into restaurant prices even more over the year ahead.

As Hassan points out, however, there is some silver lining in that process, with staple food retailers and takeaway businesses likely to do reasonably well as consumers go down market.

The Reserve Bank of Australia could also be a key player in determining just how bad things get for the sector over the next 12 months, Hassan says.

“We don’t expect another interest rate rise in 2008, but clearly if that does happen it will ratchet up the pressure on the sector and could see an even more cautious approach from consumers,” he says.