Image: Kroger
Driven largely by food deflation, some Wall Street analysts are predicting a highly promotional climate to lead to several quarters of depressed earnings for the grocery channel.
As in the past, deflationary pressures are expected to drive grocers to pass along any savings possible to consumers to stay competitive and hopefully gain market share.
"The current landscape is now beginning to look a lot like 2009, when meaningful deflation resulted in an industry price war and multiple quarters of declining earnings," Credit Suisse analyst Edward Kelly said last week in an investor note. He noted that the "price war of 2009/2010 carried on for three to four quarters before abating."
The price of food bought from grocery stores in July plunged 1.6 percent versus July 2015, the eighth consecutive month of declines, the sharpest since January 2010, and the largest one-month decline since 2010, according to the U.S. Department of Agriculture.
A Wall Street Journal article notes that the U.S. is on track to show its longest stretch of falling food prices since 1960. The trend is being attributed to an excess supply of dairy products, meat, grains and other staples; weaker demand for overall commodities from China due to the strong dollar; as well as lower energy costs for transportation and refrigeration. Moves by Walmart to slash food prices earlier this year and the expansion of low-price chains such as Aldi and dollar stores are exacerbating the pricing pressures.
Last week, Kroger, Supervalu and Sprouts Farmers Markets lowered their full-year guidance due to price deflation and heightened competition
Kroger, the world's third-largest retailer behind Walmart and Costco, warned that deflation in food prices could persist into next year. On a conference all, however, Kroger officials noted the importance of freshness, variety and customer service.
“I think it's always incredibly important for us to remember, and this is as much inside the company as external, is the customer decides where to shop, and price is only one element of that decision,” said Kroger’s CEO Rodney McMullen.
- Food deflation woes hit Kroger in new 'grocery price war’ – CNBC
- Kroger Cuts Full-Year Outlook Amid Food-Price Slump – The Wall Street Journal (sub. required)
- Low food prices force Kroger to cut profit forecast – Reuters
- Profits fall as Kroger battles sinking food prices – Cincinnati Enquirer
- Food Price Deflation Cheers Consumers, Hurts Farmers, Grocers and Restaurants – The Wall Street Journal (sub. required)
- Kroger Co.’s second-quarter 2016 conference call – Seeking Alpha
- Kroger explains food deflation – RetailWire