The Conundrum: Falling Retail Prices and Price Wars

The Lempert Report
July 19, 2017

Rabobank reports that Food Prices at Supermarkets have been falling since December 2015.

Supermarkets, faced with price deflation, increased competition, and an evolution in the types of products being sold at retail are faced with a situation that is complex and risky. 

Kroger’s CEO, Rodney McMullen has seen its stock price drop almost 20% in mid June after a 13-year run of increasing same store sales every quarter has been quoted as saying: “the next five years will be more competitive than the last five”. In mid June he announced Kroger will be slashing prices to stay competititve. 

As of April 2017, the U.S. shopper was enjoying the 17th consecutive month of falling supermarket food prices and helped compensate for the overall rise in prices - the consumer price index rose 2.4% in the twelve months to March 2017. 

We’ve talked before about price deflation and there are three basic causes: 

•A surplus in agricultural production for a range of commodities including dairy products such as milk and cheese as well as meat and eggs. 

•A stronger dollar means less exported foods, which has added to the surplus and making food imports less expensive. About 15% of the total U.S. food supply is imported, but half of our fruits and one-fifth of our vegetables are imports. 

•Increased retail competition – Lidl, Aldi, Walmart and now Amazon’s acquisition of Whole Foods have created a new pricing paradigm that conventional supermarkets are struggling to understand and compete with resulting in many retailers, like Kroger, lowering prices to increase store traffic. 

For national brands these factors have produced an environment where retailers are fighting back to lower prices and the threat of more private brands growth and promotions are creating a no-win situation.