Grocery stores caught in price squeeze

Thursday, May 22, 2014

by SUSAN MANN

Competition among Canadian grocery retailers is so fierce they have been unable to pass on all of their increased costs for meat and produce to consumers during the first quarter of this year and have had to cut prices on packed goods, according to a new George Morris Centre study.

Kevin Grier, George Morris Centre senior market analyst and author of the study, Competition Leads to Food Price Deflation, says “to me the interesting thing was the fact that prices (for packaged goods) are declining” and the year over year decline is a relatively new occurrence.

“The year over year quarterly decline in packaged goods pricing as reported by StatsCan (Statistics Canada) started in the third quarter of 2013,” the study says.
With that noted, the order of magnitude of the decline has been steadily widening.”

The study notes that 2014 first quarter Consumer Price Index data shows that the price increase in food store purchases is lagging behind the overall inflation rate, which increased in this year’s first quarter by 1.4 per cent compared to the first quarter of 2013. But the price of food purchased from stores increased by 1.3 per cent in this year’s first quarter compared to last year’s first quarter, while restaurant prices increased by 1.1 per cent for the same time period.

First quarter food price increases were driven largely by fresh meat and produce, the study says. Fresh fruit and vegetables increased by four to six per cent in the first quarter of this year compared to 2013 and meat increased by slightly more than two per cent. “The price increases in those items would have been driven by supply challenges mostly and by the immediate cost impact of the depreciated Canadian dollar,” according to the study.

“What is, perhaps most interesting is the fact that it is only the fresh commodity-based items that are driving pricing,” the study says. “The other board-based categories, surprisingly including eggs and dairy, are showing year over year declines. Looking deeper into the packaged goods pricing reveals that grocers have been enduring pricing deflation in 2014.”

Grocers’ meat product costs increased by about four per cent in the last quarter of 2013 compared to the last quarter of 2012 and grocers would have been trying to pass those increases along in the first quarter of this year but only succeeded in getting a two per cent increase in meat prices, the study says.

For produce, grocers’ last quarter of 2013 costs increased by 12 to 14 per cent compared to the last quarter of 2012 but like meat they have been unable to pass all of the increase along and only succeeded in increasing produce prices by four to six per cent in the first quarter of this year, the study says. “Grocers have not been able to pass along all of the 2013 fourth quarter costs increases for meat and produce as of the first quarter of 2014.”

Grocers will be trying to force produce and meat pricing higher in the second and third quarters of this year “in order to recoup the increases,” the study says.

Grier says he doesn’t know if grocers will be successful in recovering all of their increased costs from the last quarter of 2013 during this year. “That would be the idea, but the limiting factor again becomes competition and what they (the grocers) will be able to achieve.”

The big story is “the competition among grocers is doing this,” he adds, noting competition is causing the deflation of the consumer packaged goods and it will be the determining factor in whether grocery retailers be able to recoup their cost increases.

Weighing in on the grocers’ decisions to consider putting prices up this year is whether they consider the factors contributing to their higher costs to be long term. “They might not want to raise vegetable prices, for example, if they think they’re going to go back down again. They prefer stability as opposed to going up and down.”

On the meat side, “they probably are resigned to the fact that these prices are going to be long term increases,” he adds. BF