Food waste benefits UK supply chain by up to £1.5 billion

There has been much recent coverage in the trade press about ReFood's 2020 vision campaign (see e.g. here). According to reports food waste is costing the UK £17 billion per annum. An extraordinary sum and at face value seems to offer the potential for vast savings. But is it accurate, or does it suffer from the common problem of failing fully to incorporate the opportunity costs involved in eliminating food waste?

ReFood/WRAP figures suggest that households waste 4.2m tonnes of food and 4.3m tonnes are lost in the supply chain. So roughly a 50/50 split. This means that the supply chain alone is wasting £8.5 billion every year. Wow.

But of course there is a reason that waste exists and that actors within supply chains "over-order". It is to reduce the risk of lost sales caused by having insufficient stock available. This risk is asymmetric as the value of a lost sale will outweigh the costs of material inputs, and this creates an incentive to over-order to guarantee stock availability. The lower the proportion of material input costs in output value, the greater the incentive to over-order.

For our food supply chain, I presume that the £8.5 billion figure is actually final sales equivalent. Assuming that retailers have a margin of around 15% and that the incentive is to over-order up to the point where the additional stock would outweigh the value of an additional sale foregone, this would mean that the £8.5 billion of food waste actually has a value to the supply chain of circa £10 billion. In other words, eliminating the food waste would provide £8.5 billion of savings but at the same time would lead to £10 billion of losses - an aggregate loss of around £1.5 billion.

We can therefore deduce that the presence of this food waste actually benefits the UK supply chain by up to £1.5 billion every year (given current policies and technologies) and as such is a good thing.

(This is a v simplistic approach and in reality the optimisation problem would be based on p(lost sale), which is influenced by a range of factors, including technology, logistics, timing, demand, etc and costs to consider would include waste management costs as well as input costs, etc.)

[Separately, I would argue that the £8.75 billion wasted by householders is caused by the incentive of avoiding unforeseen additional trips to the supermarket. £8.75 billion is the equivalent of 700m hours (based on median hourly wages of £12.50), or just under half an hour per week per household. If eliminating this household food waste raised time spent on food shopping by over half an hour per week then householders would lose out and the net benefits to the economy would be negative.]