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The high cost of low food prices

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GUELPH — The high cost of low prices for food stretches far beyond retail casualties in the food sector.

Case in point: Leamington, Ont., Canada’s self-proclaimed tomato capital, received news in November that Heinz will close its plant, laying off more than 700 employees and eliminating many regional farmers’ sole client. Ironically, while Canadians will likely have access to cheaper tomato-based products as a result of this closure, many are losing jobs in the agrifood sector. It will be the same for Corn Flakes and Raisin Bran lovers since the London-based Kellogg plant will also be shutting down next year.

This is little doubt that consumers have benefited greatly from the discounts on many food categories like dairy products, pasta, coffee, and spices. The price of rice, yogurt, ice cream, and peanut butter actually dropped last year, a first in more than two decades in some cases. Given the increasing scope and scale of aggressive pricing strategies in the food business, the situation will likely worsen before it gets better for food retailers, to the delight of Canadian consumers.

In fact, several staple products have now become loss leaders for food vendors, normally a bad sign for industry. Loss leaders are usually inconveniently located in food stores to compel consumers to pass, and buy, items with higher profit margins. In an effort to retain market share, food retailers have no choice but to more frequently promote loss leaders.

And the market landscape has changed. Target, a small player in the food space, entered Canada in early 2013 with an aggressive goal to open 124 stores and increase its food offering in the future. Walmart, a powerful threat to established Canadian food retailers, proactively kept food prices competitively low in the midst of the impending expansion and continued to ensure its viability in the grocery market.

Loblaw, Canada’s largest food retailer and private employer, is desperate to reach new urban markets where consumers can cope with higher price points. This is mainly why it bought Shoppers Drug Mart last year: to offset the Walmart menace. On the other hand, Sobeys had a very good year with its purchase of Safeway to tap into Canada’s very lucrative Western market. The robust Western economy makes Ontario and Quebec look like proverbial poor cousins.

Metro, which allegedly lost to Sobeys in the battle to acquire Safeway, is the one which may have the most to lose next year. Sales are dropping and it has already announced the conversion and closure of some Ontario-based stores. More market retraction is expected if it fails to scale up.

Couple the highly-competitive nature of the food retailing landscape in Canada with a low-inflationary global economy would certainly appear to be welcome news for consumers, especially those affected when food prices skyrocketed from 2009 to 2011.

At that time, the high cost of food created havoc in developing countries and hurt consumers struggling to get by financially. To stretch their dollars, consumers were forced to invest in highly nutritious food instead of just buying fuel to survive. Food was not as trivialized as before, and that was a good thing.

But now, the situation has completely changed as the food industry struggles to achieve growth. Analysts expect food prices to increase by no more than 0.5 per cent next year. And looking at the macroeconomic fundamentals, it can be argued that these predictions will be accurate by year’s end next year.

To reflect the true cost of distribution, food inflation’s sweet spot would be anywhere between 1.5 per cent to 2.5 per cent right now. Such a threshold would flush the industry with more resources to innovate while building a case for consumers that food is not inconsequential.

As we embark upon another year of low food price inflation, let’s hope consumers don’t forget how important food is to all of us.

 

Sylvain Charlebois is associate dean at the college of management and economics at the University of Guelph in Ontario.

 

—troymedia.com

 

 

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