Food Deflation: Why Should You Care?

February 02, 2017

Food deflation is having an economic impact on retailers that all RDs must understand.

It seems that the term food deflation is being used to explain lower retailer stock prices, layoffs and why you didn’t get a raise last year. 

It’s true that just about all supermarket chains from Kroger to Whole Foods have seen their bottom lines erode at the same time as their revenue fell. Food prices fell to a record low not seen since 1967. According to the USDA (United States Department of Agriculture), retail prices for beef, pork, and poultry were expected to end the year with a slide of 6% to 7%, 3% to 4%, and 2% to 3% respectively.

So why has this happened?

There are two basic reasons. The first is that prices went up because of Avian Flu, the California drought, smaller cattle herds and other environmental factors across the globe. It is misleading to say that as these supplies eased and prices came back to normal levels that we witnessed a significant price drop – it was more of a price correction.

The second is that the 2016 strengthening of the US dollar has had a major impact on declining food prices – the dollar as measured by the AMEX Dollar Index, gained 4% against the group of other major currencies (the Euro, Japan’s Yen, Canadian dollar, Swiss Franc and Sweden’s Krona) during the year; this slowed exports and boosted imports which increased the domestic supply of foods.   The USDA reports that the US agricultural exports decline is estimated around $1 billion, while imports increased by an estimated $7 billion in 2016.

The impact that all of this had on your retail store was a heavier than normal promotional environment as many retailers passed on these lower prices to shoppers to gain a competitive edge against other brick and mortar stores and the growing ecommerce competitors. The problem is that when price wars start, there always seems to be no bottom and in order to maintain these lower prices retailers were forced to dip into their margins to stay competitive. The result has been layoffs, store closings and for some chains like Whole Foods even closing manufacturing facilities. Kroger (KR), Whole Foods Market (WFM), Sprouts Farmers Market (SFM), and Supervalu (SVU) lost 17%, 29%, 8%, and 31% of their respective value last year; while Walmart (WMT) gained 13%.

The question everyone wants to know the answer to is “just how long will this food deflation continue?” The answer is that while certain prices in categories like beef and eggs have leveled off, the competition for food dollars in particular from online shopping and the smaller format low-cost positioned Aldi and Lidl stores is far from over. The price wars will continue and while shoppers will benefit, most supermarkets will not.