Market analyst links grocer competition with food spending decline

Wednesday, February 5, 2014

by MATT MCINTOSH

Canadian consumers spent less on food in 2012 compared to the previous year and one farm industry expert suggests the drop may be connected to the intense competition between grocery stores that has resulted in pressure on producers to reduce the price of their products.

According to Statistics Canada’s survey of household spending released in January, Canadian consumers spent an average of $7,739 on food in 2012, which is 0.7 per cent less than the average expenditure on food in 2011.

When broken down, consumers spent 1.8 per cent less at restaurants and 0.3 per cent less at grocery stores in 2012 than in the previous year.

“Assuming we didn’t eat less, the reduction means consumers are buying cheaper products, and obviously are not going out as much,” says Kevin Grier, senior market analyst at the George Morris Centre. “When people are in a pinch, more expensive food is often one of the first things to go.”

Grier also says that competition at the grocery store level contributes to lower prices for consumers, which could be a major reason why the amount of money consumers spend on food dropped in 2012.

Vinay Kanetkar, a professor of marketing and consumer studies at the University of Guelph, also says competition between retailers is a key factor affecting food prices. Just don’t call that competition a price war.
 
“There is evidence to suggest that food prices have remained fairly flat,” he explains. A price war, he adds in a Tuesday email, is usually described as having the following characteristics: 

1. “The actions and reactions focus almost exclusively on the competitor instead of the consumer.
2. The pricing interaction as a whole is undesirable to the competitors.
3. The competitors did neither intend nor expect to ignite the price war through their preceding competitive behaviour.
4. The competitive interaction violates industry norms.
5. The pricing interaction occurs at a much faster rate than previous such interactions.
6. The direction of the pricing is "downward" spiral of prices.
7. Mainly: the pricing interplay is not sustainable”

Kanetkar does say that new entrants into the market – such as Wal-Mart Canada Corp. – and where those new entrants source their food may be the cause of some downward pressure on prices.

“Prices might have dropped a little due to normal responses to competition,” says Kanetkar. “From the farmer’s perspective, it can be a difficult thing since big stores often have their own supply chains and do not rely on local farmers.”

According to the Canadian Federation of Agriculture website, the local food movement may also encounter pressure to reduce prices to reach larger markets.

The website notes a recent survey sponsored by Farm Credit Canada “demonstrated that 95 per cent of respondents agreed that buying locally-grown food is a priority or preference; however, only 43 per cent are willing to pay more for local products.”

Mark Wales, president of the Ontario Federation of Agriculture, notes Canada’s Food Freedom Day is a useful tool when looking at trends in food prices. Canadian Federation of Agriculture determines the day, which reflects the point in time when the average Canadian has earned enough to pay for their grocery bill for the year.

This year, it arrives Feb. 7, a week earlier than it was in 2013.

“Part of the reason for the earlier date could relate specifically to lower grocery store prices, or more generally consumers buying cheaper products,” Wales says.

The website said the consumer’s focus on cheaper products is also an issue for Canada’s food processing sector, which has seen the closure of over 80 processing plants – including Heinz and Kellogg’s – since 2007. BF