Tesco PLC (LSE:TSCO), J Sainsbury PLC (LSE:SBRY) and other UK supermarkets are better placed than peers in other countries as food prices rise faster than before the pandemic and shoppers eat at home more often, according to UBS.

The investment bank questioned whether the long-term global food inflation average of about 2.5% had become obsolete, declaring in a new report: “The End of Cheap Food?”

By contrast, UBS was neutral on the more fragmented US food retail market, led by the likes of Walmart Inc (NYSE:WMT), Costco Wholesale Corp (NASDAQ:COST) and Kroger Co (NYSE:KR), arguing that intense competition would largely limit their ability to pass higher costs on to shoppers. Continental Europe is similar, facing many of the same pressures, with greater fragmentation diluting pricing power.

UBS identified five forces likely to keep food prices rising more quickly over the medium to long term, with one being climate-related supply shocks, which alone could add between 0.9 and 3.2 percentage points to inflation, with global heatwaves and a developing El Niño increasing the risks in 2026.

Poor farm profitability is also seen as restricting investment, while higher animal welfare standards and rising labour costs are adding to producers’ expenses. At the same time, demand growth is running ahead of supply.

UBS said squeezed margins across the food supply chain meant most additional costs were likely to be passed to consumers.

The UK was described as the best-positioned grocery market, as its relatively “rational competitive landscape” enabled supermarkets to pass through more of their rising costs. In industry jargon, ‘rational’ means competitors are not aggressively undercutting one another and starting a price war.

One effect of higher grocery bills could be to encourage consumers to eat at home more frequently, reversing a decline in the category’s share of household spending.

That would provide a potential tailwind for food retailers but squeeze spending on restaurants, clothing, fashion and home furnishings, UBS suggested. 

Agricultural technology could eventually improve yields and reduce costs, the analysts said. Funding for the agtech sector rose to $14 billion between 2020 and 2025, compared with $6 billion during the previous 15 years.

However, analysts said high costs, operational complexity and uncertain returns meant adoption remained too slow to prevent food prices from rising.