Grocers scramble to offset higher food, fuel costs - INFLATION

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Niccolo and Donkey
Grocers scramble to offset higher food, fuel costs

The Globe and Mail

Marina Strauss

May 1, 2011

Call it the incredible shrinking package. Loblaw Cos. Ltd. ( L-T 40.220.340.85%) recently scaled back to 750 grams from 800 grams the amount of cereal in a box of one of its President’s Choice granolas, but has also raised the price to $5.79 from $4.99 since last year.

Loblaw is far from alone in downsizing packages and upsizing prices. It is a common practice in the grocery industry, underscoring how supermarkets today are racing to find ways to ease the pain of higher food and fuel costs while shoring up profit margins.

After having prospered last year from a strong loonie despite food deflation and escalating competition, grocers are preparing for an era of food inflation.

Even as profit margins improve – helped by a rising Canadian dollar that lowers many purchasing expenses – Loblaw and its rivals are struggling to make sales gains in a the cutthroat environment that has seen discounter Wal-Mart Canada Corp. rapidly expand into food. On Wednesday, when Loblaw reports its first-quarter results, the country’s largest grocer is expected to shed more light on how it’s grappling with limited growth opportunity in the food aisles in a period of soaring costs.

While moderate inflation is an ally to the food retailer, price increases of more than 2 to 3 per cent can spell trouble, Loblaw president Allan Leighton has warned. Recession-shaken consumers are sensitive to dramatic price hikes, and simply switch to cheaper alternatives rather than shell out more.

When prices jump beyond 2 to 3 per cent “then it really starts to whack the market,” Mr. Leighton said in February. “I’d rather be in a place of deflation than a place of high inflation.”

In March, the tab for food bought in stores jumped 3.7 per cent, marking the biggest year-over-year increase in 19 months, according to Statistics Canada. Surges in global commodity prices, spiralling fuel prices and bad weather in the southern U.S. are continuing to drive up prices. And higher rates at the gas pump threaten to curb consumer spending.

Grocers have reported lower prices than Statscan because their customers trade down, opting for cheaper alternatives than the items included in the federal agency’s sample of groceries. But the retailers acknowledge that they’re starting to raise prices. Already this year, Loblaw hiked prices of vegetables, fruits and meats. Other price adjustments are more subtle, such as shrinking packages or launching new products.

In the case of its PC Blue Menu Raisin & Almond granola, Loblaw last week was still touting an 800 gram box on its website even though its stores carried a shrunken 750-gram package – 6 per cent smaller but almost 16 per cent more expensive than last year at its conventional supermarkets.

At the same time, the retailer stocks a new Blue Menu almond-vanilla Omega-3 granola in the same size box as the raisin-and-almond version but with just 600 grams of cereal – at the same $5.79 price.

In response to a cautious consumer, grocers try to camouflage price increases by downsizing packaging, rolling out new products or adding healthy-for-you components to justify higher rates, said Michael Mulvey, marketing professor at the University of Ottawa Telfer School of Management.

Consumers often don’t readily notice a different package or content size, Prof. Mulvey said. “So potato chips all of a sudden contain 15 per cent less chips but the bag won’t change much, in terms of its size.”

And grocers can get away with higher prices if they’re providing a more convenient or healthy product, he said. He cited the example of Pepperidge Farm’s Goldfish cheddar snacks which, at Loblaw, cost $3.29 for both a 200-gram and a 168-gram package. Because the latter consists of six 28-gram snack packs, “they’re providing consumer value, in the sense that it’s more portable, easier to pack,” he said. “It is a very effective way of selling less food for the same price and helping the bottom line.”

Another grocer strategy to deflect attention from inflation is running “last-blast” promotions before jacking up prices, retail analyst Perry Caicco at CIBC World Markets said in a recent report. Or, as Loblaw did when it unveiled its new almond-vanilla granola, the retailer initially featured it at a lower price of $3.49 before raising it to its current $5.79.

And as grocers focus on dealing with spiralling food costs, they feel strains on another front: higher prices at the pump. In a report in March, market researcher Nielsen Co. predicted that the double whammy of rising gas and commodity prices will prompt consumers to follow historic patterns: make fewer trips to the grocer, eat out less, switch to cheaper shopping alternatives and use more coupons.

“The impact on household budgets can be significant,” it said. A 10-cent-a-litre increase in gas prices slices consumer spending by $30 a month, while a 50-cent hike translates into a $124 monthly cut.

Still, higher gas prices can have a silver lining for grocers, Prof. Mulvey said. Consumers stay home more, rather than dine out or travel, forcing them to buy more groceries because they still have to eat.

Shut up Nic, we got Bin Laden!