Photo: @xertile via Twenty20
Food prices are going up, up, up. Inflation is tough, tough, tough.
The Bureau of Labor Statistics on Friday reported that food-at-home prices rose 11.9 percent over the last 12 months, the largest increase since April 1979.
Categories experiencing the largest price hikes were typically meal staples.
Among categories seeing notably high inflation in May were eggs, up 32.2 percent year over year; butter and margarine, 20.2 percent; chicken, 17.4 percent; citrus fruits, 16.1 percent; milk, 15.9 percent; coffee, 15.3 percent; ground beef, 13.6 percent; baby food, 12.9 percent; and rice, pasta and cornmeal, 12.8 percent. Food-away-from-home prices rose 7.4 percent.
Rising food, energy and shelter prices caused U.S. inflation to surge to a new four-decade high in May, heightening concerns over the impact on consumer spending. The nationwide average price for a gallon of gas last week topped $5 for the first time ever, according to AAA.
The inflationary pressures on food and fuel are being blamed on Russia’s invasion of Ukraine, which many fear will be a long-term conflict. China’s zero-COVID policy is also believed to have delayed the global supply chain’s recovery.
Moody’s senior economist Ryan Sweet told the New York Post that surging prices for food and fuel are costing American households an extra $460 per month based on his analysis of the inflation figures.
Kraft Heinz, Tyson and Campbell Soup as well as fast-food chains all recently warned they would raise prices, often on top of recent pricing actions, due to skyrocketing costs for labor, packaging, ingredients and transportation, according to The Wall Street Journal.
The Journal wrote, “At grocery stores, discussions with vendors about price increases are increasingly tense, industry executives said, as retailers worry they will lose shoppers from sticker shock.”
A survey of 2,000 Americans taken in early May by Harris Poll on behalf of Alpha Foods found the cost of groceries overtaking gas prices as Americans’ top inflation concern, according to CNBC.
Asked what they were doing to combat food inflation, the top response from consumers was taking fewer trips to the grocery store, cited by 52 percent; followed by shopping generic brands, 45 percent; entertaining at home instead of going out, 40 percent; and buying in bulk, 33 percent.
- Consumer Price Index – May 2022 – Bureau of Labor Statistics
- Food Prices to Keep Going Up, as Costs Surge – The Wall Street Journal
- Inflation costing Americans an extra $460 per month, analysis says – New York Post
- Consumers changing eating, shopping habits as inflation pushes up prices – CNBC
- Food-at-Home Inflation Hit 11.9% in May – Winsight Grocery Business
- US consumers contend with double-digit price increases at the grocery store – CNN
- Grocers fret over how to pass higher costs onto customers – RetailWire
- Supply chain outlook still ‘pretty severe,’ economist says – Yahoo Finance
- New report suggests supply chain resilience under more strain than ever as commodity prices and inflation soar – Packaging Europe
Discussion Questions
DISCUSSION QUESTIONS: What’s the obvious and less obvious fallout from ongoing food inflation on the grocery channel? Should grocers revisit their inflationary playbook at this point and make adjustments in strategy?
Poll
Loading …BrainTrust
Lisa Goller
B2B Content Strategist
Gene Detroyer
Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.
The obvious fallout: people’s wallets are getting tighter. The non-obvious fallout: consumers may view retailers and brands negatively (despite supply chain and logistics issues) for raising prices — especially when “big business” still reports huge earnings.
The biggest “big businesses” that will show astronomical earnings are the oil companies. Their margin has more than doubled on a gallon of fuel.
From our data, brand switching has increased over the past couple of months as consumers look to trade down to save money. Channel switching is also rising as consumers look to cheaper stores to hedge against inflation. Volumes in grocery have dropped a little, but not by much because food is essential and it’s one of the last things people cut. The impact of rising food and gas prices is more concerning for discretionary sectors like apparel and home as people can more easily cut back in these areas to balance their budgets.
Rising prices have resulted in value-focused shopping journeys and seeking alternatives for national brands such as private labels and bulk ordering. The rising fuel and food prices are noticeable and have a material impact on discretionary spending for fashion, luxury, and experiential purchases.
Food, transportation, fuel, and shelter are always essential purchases, and as you descend Maslow’s Hierarchy of Needs, some discretionary purchases will drop off the radar. As we are experiencing rising prices and an inflationary economy, a more significant segment of the population will be far more purposeful and conscious of their purchases.
Retailers should plan accordingly by offering incentives, promotions, and a semblance of goodwill during these challenging times. There will be an impact on the bottom line. However it’s the lifetime value of the customer that is the most critical component.
Paying an additional $460 per month for food and fuel makes disposable income evaporate fast.
Grocers need contingency plans for factors like lower revenue, fewer store visits, in-demand essentials and discount stores’ competitiveness. Consumers may buy fewer animal products, which are among items earning the sharpest price increase. Food security has emerged as a growing concern.
Now grocers must find new efficiencies across their retail operations. Investing in process automation and data insights modernizes grocery fulfillment and marketing. To drive sales, grocers can help shoppers save money with private label, deals and bulk discounts. As grocery gets more complex, retailers need agility, efficiency and innovation.
Yes! Absolutely not too late for grocers, even small independents to get in the game of process automation, insights to find greater margins. Lots of tools in the market now which can be activated for improving the supply chain, shelf management, shrink, CPG deals, promotions.
Unfortunately, concerns of mental health are top of mind for me. Our nation has already been reeling from the effects of the pandemic coupled with the instability of regions across the globe and at our border. Now add the hard-hitting inflationary issues causing pain at the pump and greatly-diminished spending power.
Specifically, what can grocers do?
Prices! Prices! Prices! Everyone is talking about prices.
But, at the same time, employment is at a record high and wages in the United States increased 11.67 percent in April of 2022 over the same month in the previous year.
Inflation will not go away anytime soon, but it will work itself out as new prices (sticker shock) and income realization are changed in shoppers’ minds.
This is where store loyalty programs can help alleviate some of the ouch, such as buying gift cards for things you’re going to buy anyway at the grocery store that convert into gas or grocery discounts.
Groceries are tough for many people today. One thing this escalation of prices has done is create super shoppers. At a dinner engagement I listened to conversations about how “shameful” prices in stores have become. I was amazed how accurate they were. Price issues are creating “expert supersmart” grocery shoppers. The conversations at this dinner engagement were amazing and scary. We’re creating new, smart customers!
Wages are up, but net earnings are now going down. For the grocery stores the pressure is going to get even greater as shoppers give up the convenience of prepared meals and go back to cooking their own meals. No more salad mixes — they will again start buying lettuce and making their own salads. A real hit on profit margin. Good for companies like Aldi. Limit assortment, lower labor cost, and good quality.
To me the big question is “will they stay higher?” Although core prices over the past century seem to have gone in only one direction (up!) most of the increases this time seem to be tied to oil prices … which are notoriously cyclical; we are also still unwinding from the pandemic.
So while I expect this will still be an issue 4-6 months from now, I’m more curious about 1-2 years from now.
In addition to using tech to realize operational efficiencies, grocers need to communicate well to customers before, during and after they shop. Marketing and Merchandising teams should now be communicating where to find value, how taste vs. price equation helps to make decisions (sometimes spending a little more is better), how to redeem coupons, how to easily cook something at home. And how store teams are available to help them. These are important times to win customer loyalty and brand trust.
The biggest issue with inflation right now is that it is approaching a level not seen for 40 years — therefore there are no business executives who have experience managing in such a situation. Grocers are caught in the firing line as their costs rise but consumers are struggling — yet shareholders still demand a return. The big difference between now and 40 years ago is that retailers have something that is hugely valuable they use in order to offset some of the price rises: Data.
Data and data analysis can be used to understand customers and how they shop thus improving targeting, it can provide unique insights into business operations to eliminate inefficiencies, it can be used to reduce fraud and it can also be used to enable a lucrative new revenue stream by means of retail media networks.
Food prices are going up from many things, but the real truth is what is the impact of inflation when fuel is not a part of the equation? Eggs are increasing in price because of the bird flu that is causing hundreds of thousands of chickens to be destroyed to eliminate the spread of the infection. This has also increased the price of chicken. Milk pricing is directly linked to the cost of fuel because milk is so heavy and expensive to transport. The same for canned goods. The list goes on and on. None of these products are linked to the war in Ukraine and shouldn’t be.
America is the largest exporter of oil in the world, and last year sold over 5,000 new oil leases, which increases the total oil leases for drilling to 9,000. These are largely unused because the oil industry cannot get enough workers (they laid off 20% of their workers because of the pandemic), or equipment (they cancelled their future orders in 2020 because of the pandemic) to increase production. This leaves us short on supply which causes pricing to go up … not the war which would only impact our availability by 7%!
After sticker shock at the gas pump, one of the first places consumers feel the effects of inflation is at the grocery store. And if they haven’t already changed their purchasing behaviors as a result, given the current trajectory of the market, they soon will. Grocers can get ahead of these shifts by thinking about the types of changes consumers will be making, and offering increased value through promotions to move shoppers in-store or online or affect product choices. It’s becoming a lot less about how product is stocked on the shelf and more about using strategic, personalized promotions to get in front of the right consumers to offer them the precise value they are looking for.