The View from the West

Winnipeg Free Press - PRINT EDITION

Food for thought about coming grocery prices

By: Sylvain Charlebois

Posted: 08/26/2009 1:00 AM | Comments: 0 (including replies)

Good news for consumers: food prices at retail are levelling off, having risen only 5.6 per cent since July of this year. Normally, this would be perceived as a significant increase, but not by contrast to recent price hikes.

Between November 2008 and March 2009, prices rose by nine per cent, but inflation has been ticking steadily lower since then, increasing pressure on food retailers to keep prices low. Food retailers, who are known to convey costs to consumers via price increases, won't be able to bump up margins, revenues and profits that way for much longer. With the spectre of deflation on the horizon and consumers in larger, urban markets losing jobs, food retailers may have to struggle amongst one another to retain market share.

This means food prices may actually drop in the coming months.

A few weeks ago, Loblaws announced that it would reduce prices on 3,000 products sold in designated areas throughout the country. Loblaws, the biggest grocer in the country, did that for one reason: to get a head start on the competition.

A looming price war in the food business is welcome news for cash-strapped consumers. Grocers, on the other hand, may face some challenging times down the road, and shareholders seem to agree. Given the significant jumps in profit from Canada's main grocers this fiscal year, share prices for the main food retailers are not faring too well. Share prices for Loblaws have fallen six per cent, Metro by 1.6 per cent and Empire (Sobeys) by more than 14 per cent.

Recent decisions to improve internal efficiencies could help grocers survive the forecasted rougher seas of economic deflation. Many grocers have already invested significant resources in logistical, technological and distribution capacity. The current production model, automation, removes all those links in the supply chain. The value-added mantra was not just about products offered to consumers; it also involved the manufacturing and distribution level. These changes were implemented to compete with non-food retailers like Wal-Mart. In order to offer decent prices, Wal-Mart focused on one main competitive advantage -- logistics. Food retailers, most notably Loblaws, took note and enacted similar changes to their internal operations.

Food retailing has also seen its share of consolidation. The last time we saw prices go down in the food industry was the end of the last century. At that time, Canada had more and more various grocers that it has now. The main players today, Loblaws, Metro, Safeway and Sobeys, are highly efficient, can compete on a larger scale and can build economies of scale that reduce operational costs.

Canadian grocers have outlasted downturns before, and they know how to surmount the challenges of a recession. While the food industry is often described as recession-proof, that's not really the case. People need to eat, but consumers have the freedom to choose from a few different purchase points coming from several distribution channels. Over the years, food retailers have acquired the knowledge to manage cycles, and this recession is no different.

Canadian consumers should take advantage of a generous food retail market. Many experts expect the so-called price war will not last. For the long term, the relatively good news for farmers is that commodity prices have risen by 30 per cent in dollar terms since the start of this year. This means we may see more increases of food prices at retail this winter or early spring, but nothing like this year. Commodity price hikes do take time to flow through supply chains before consumers see any price increases, but the next increases won't be as abrupt, or as large, as this year's.

Sylvain Charlebois is the associate dean of the Johnson-Shoyama Graduate School of Public Policy, University of Regina, University of Saskatchewan.

Republished from the Winnipeg Free Press print edition August 26, 2009 A11

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