Photo: RetailWire
Is inflation giving grocers a bad rap?
Shoppers believe grocers are making 14 times more profit than they actually are and also believe food-at-home inflation is about two times higher than reality, according to a new dunnhumby analysis.
The survey taken in November found U.S. shoppers believe:
- Grocers are earning a 35.2 percent net profit margin, 14 times higher than the average of 2.5 percent.
- Consumers believe food-at-home inflation stands at 24.3 percent, more than twice the 10.4 percent year-over-year inflation figure released Tuesday by the U.S. Bureau of Labor Statistics.
“Retailers are in a precarious position with their brand perception, since customers are vastly overestimating grocers’ store profit margins and inflation rates, while they themselves are battling food prices,” dunnhumby president of the Americas Matt O’Grady said in a statement. “Retailers need to show they are empathetic to customers through their prices, their rewards/loyalty offers, and with messaging to best support shoppers during these challenging financial times.”
The survey findings come as grocers are reportedly seeking price reductions from suppliers or demanding proof they need to keep prices high as inflation cools.
In the UK, Tesco chairman John Allan in January told the BBC that it was “entirely possible” that some food firms were using inflation as an excuse to hike prices.
Last week, the U.K. upscale grocer Waitrose committed to lowering prices by £100 million across a range of essential products. James Bailey, Waitrose’s executive director, said in a statement, “We understand that getting value for money has never been more important for everyone.”
In Canada, members of Parliament have summoned the heads of the country’s largest grocers to answer for skyrocketing food prices and surging corporate profits.
Loblaw recently began defending itself on social media by pointing out its low margins and blaming suppliers. One response on Twitter read, “We may be the face of food inflation but we are certainly not the cause. Food prices are higher in our stores simply because the manufacturers who make the products are charging more for them.”
- Americans Believe Grocery Store Profits are 14 Times Higher than Reality and Inflation Is Twice as High as Actual, dunnhumby Finds – dunnhumby
- Study: Shoppers think grocery stores are raking in cartfuls of cash – Winsight Grocery Business
- Greedflation: ‘Entirely possible’ that food brands are profiteering from price hikes, says Tesco chairman – CNBC
- Waitrose announces record price cuts – without compromising on quality – John Lewis/Waitrose
- Big grocery store CEOs summoned to testify at committee studying food inflation – Global News
- Loblaw says it’s not to blame for higher food prices as grocer faces backlash online – Global News
- Should grocers be demanding price decreases from suppliers? – RetailWire
- Are grocers profiteering from inflation? – RetailWire
BrainTrust
Lucille DeHart
Principal, MKT Marketing Services/Columbus Consulting
Andrew Blatherwick
Chairman Emeritus, Relex Solutions
Matthew Pavich
Sr. Director Retail Innovation at Revionics, an Aptos Company
Discussion Questions
DISCUSSION QUESTIONS: Are grocers in a “precarious position with their brand perception” in the face of rampant food inflation? Should grocers be taking further steps to show empathy or otherwise help households offset inflationary pressures?
It isn’t the job of consumers to understand how the grocery market works, so it’s hardly surprising that people have a poor grasp of profitability and margins. However the fact remains that grocery is an extremely low-margin sector and that most grocers try to deliver good value for money. As much as consumers understandably grumble about higher food prices, retailers don’t really have a choice but to pass along some of the increases. And as every retailer is more or less in the same boat, if inflation damages brands then it will harm all retailers. That said, it is important for retailers to work on things like range segmentation, own-label development, and opening price value tiers to give consumers options to save.
Grocers are caught between the veritable rock and a hard place. Consumers want lower prices, yet suppliers are charging higher prices. It feels like suppliers are following the oil industry’s playbook: quick to raise and slow to lower. Grocers can’t really push back too much. Their best tactic may be to push their private label and advertise its quality and value.
Maybe there’s a good opportunity here for grocers to better publicize lowering their prices—when they do. Loblaw is right to try to use social media in order to get in front of this perception gap. I think one message could be something like “We all hate inflation. It might not look like it, but we are trying our hardest to continue to offer you high quality foods at reasonable prices.”
Good points Ken, especially the strategy to promote the value of private label brands when prices are high. As others noted, consumers have a distorted perception of margins that is way off from reality. Consumers that choose to switch grocery chains will find that prices are pretty consistent, except for discount/warehouse grocers where they can save a few bucks.
Only with people who are uninformed. What is rich about this issue (especially in Canada) is government policies are in many cases the cause of inflation. So let’s call in those filthy retail capitalists and make them “explain.” … Beyond stupid.
Inflation raises prices. Nobody likes paying more. Unfortunately, a price increase becomes very obvious to the consumer in a grocery store. They see their food bills creeping up and many, especially in this rocky economy, are having to adjust their daily, weekly, and monthly budgets.
I think if retailers weren’t out of stock so often, people would grumble less about the high prices of product they can buy.
It also raises the question, how are grocers not more visible helping out in hurting communities?
The general public has never understood retail math — ever. But that doesn’t change the fact that there is indeed a perception problem. I’ll be on the lookout for individual brands and retailers when they report quarterly numbers. That’s what tells the tale. Squeezed profits mean not guilty of price gouging. Record profits in inflationary times means guilty of price gouging. I’m looking at you, oil companies.
It is unfortunate that uninformed consumers can dictate business policy, but “the customer is always right” holds up here as well. The pandemic, supply chain and inflation have been the trifecta of marketing chaos, but have also provided a pivotal moment for grocers to transform. Some brands have actually used eggs as a loss leader to build store traffic, others are redefining their pricing models and private label penetration. It is an exciting time for the grocery industry, bumps and all.
Perception is reality, unfortunately, yet grocers aren’t charities and must react to market conditions just like any other retailer. Even so, the advantage goes to multi-category players that have more room to breathe. Walmart has made a point of publicizing its efforts to keep food costs down, however it can make up for it elsewhere — including with solutions and services. More grocers like Kroger, H-E-B, and others are adding higher-margin discretionary categories to stores to hedge against food inflation and plump up profits.
Prices for nearly every category in every industry are higher than two years ago. Consumers might find it easy to blame grocers, but I just paid my heating bill last week and it was exorbitant and gas pump fuel is on the rise again. In this inflationary time, grocers should over-communicate their value deals, their loyalty programs, and their in-house brands that can provide important savings for consumers.
There is no denying that consumers have deep concerns about their ability to afford everyday essentials like groceries. With inflationary pressures continuing to cause pressure on household budgets, SNAP benefits shrinking as emergency benefits end next month in two-thirds of states, and supply chain issues causing ongoing disruption across multiple categories, it is absolutely imperative for grocers to:
Many grocers have raised the bar and consumers are taking note. As an industry, it’s time for key stakeholders across the supply chain to shine.
Grocers’ brand perception has taken a hit. Research, like dunnhumby’s helps grocers hit back with facts to dispel myths.
To help consumers, grocers offer deals and value bundles, ask suppliers for lower prices and invest in private labels.
Consumers are upset about inflation. Grocery prices are certainly an area where inflation became very visible. Retailers have an opportunity to improve their brand perception if they can create a story about their specific pricing strategies and the things they are doing to minimize or offset price increases for their customers. Sam Walton took this very approach in the ’70s and it certainly paid off for him.
So true! “We may be the face of food inflation, but we are certainly not the cause. Food prices are higher in our stores simply because the manufacturers who make the products are charging more for them.”
Grocers love inflation. So does every other industry that sells directly to the consumer. Read: oil and pharma. Any sector holding historical margins makes more profit in a high inflationary period.
Putting the onus on the grocer is showing a lack of understanding of where the pricing is coming from. Grocers are merely passing on the pricing they get. Yes they extend their absolute margins, but their percent margins are mainly constant.
Inflation hurts everyone. Unfortunately retailers are the ones who have the greatest exposure because they have direct interaction with the consumer. In general I don’t think it is their fault but they certainly must deal with the consumer’s perception. Grocers need to educate the consumer to help put pressure where it can be most beneficial.
Consumers don’t see margin. They only see price. That is how you win their trust — especially during inflationary times. It doesn’t matter how informed they are or not — if they think your eggs are more expensive than your competitor, they will shop elsewhere. It’s your job as a retailer to win on price.
It is understandable that consumers think retailers are profiteering with prices rising. The retailer is the face of their shopping experience and as prices are rising and have been rising fast it is the retailer who appears at fault. Consumers do not understand the margin that retailers are making so it is up to the retailer to present the best value they can. Own-label is key in this respect as it generally represents a better value than national brands — consumers then have a choice to trade down to get better value giving the retailer a better perception.
The very public call by retailers to manufacturers to reduce their prices is part of the messaging, unfortunately it is often read as retailers squeezing manufacturers to make more profit. Getting to the right mix of promotions, own-label ranges and customer loyalty schemes offering lower prices is working for some of the leading UK and European retailers.
Let’s see, Safeway Northern California Division currently posts regular prices like 12pk Coke or Pepsi $9.99, $21.99 per pound Ribeye Steak, $7.99 per pound 80% Lean Ground Beef, 30oz Miracle Whip $10.79, or 5.5oz Friskies Cat Food $1.29. Sure they’re on sale usually, so nobody pays those prices but….
So is inflation giving some very greedy grocers with pricing that is clearly out of control a bad rap? Absolutely.
Oh and those grocers are posting record profits too….
My own grocery shopping experiences suggest food retailers deserve part of the blame for higher prices. In stores I visit (Safeway, Fry’s, Costco) it appears they have moved up their private label prices in some categories under cover from rising brand prices.
(Yes I’m well aware that some supplier and transport costs have risen beyond their control.)
Here is where pricing optimization software now in common use might lead retailers astray. Margins may benefit, with only slight loss of unit volume, but price image (the perception that retailers’ prices make sense and are trusted) suffers badly.
No surprise that consumers in the dunnhumby survey say they feel ripped off. When a weekly basket that cost them $90 a year ago now costs $110 and fewer items are offered with TPRs they figure the fix is in.
That may not seem fair to grocers, but the feeling is mutual.
I don’t know that grocers are being blamed — the survey results notwithstanding — but I think specific brands are, and in many cases with good reason. The other day I reached for a certain product that, after being $1.89 for some time had been raised to $2.29 … now it was $2.49. The price is the same between different stores, so I don’t fault the store itself. I have a good idea where to point the finger.
As for “showing empathy” — whatever that’s supposed to mean, please, no … you’re my grocer, not my bartender.
Grocers should always be communicating with customers about how they are making business decisions, finding new products, and making deals to save them time, money. In challenging economic periods, it’s even critical.
Unfortunately, perception about grocery inflation worsened several months ago thanks to some elected officials making a spectacle, some even suggesting grocers were to blame. Once again, misunderstandings about the industry requires constant education in how thin margins are common, and how they operate successfully.
Consumers have no clue how inflation is measured, how much retailers make (in gross margin or net margin or any other way), why prices are rising, and the reasons they keep rising for many categories (like eggs — because of the avian bird flu which forces farmers to kill off thousands of hens to protect the rest of their flock). Consumers and their relationship with money and their own finances is bad, let alone their ability to properly manage their finances or understanding of how the fundamentals of a business work. It is not the retailer’s position to attempt to educate them on this, and assuming anything close to this position for the retailer is not why the retailer is in business. Inflation is a force that everyone has to deal with, yet cannot control.
Grocers are in a tough position. Margins have always been razor thin but as the cost of farming increases due to fuel and fertilizer costs farmers are being forced to increase prices. Many consumers want a fair deal for farmers but at the same time expecting grocers to minimise cost to consumers.
Perception of high margins is clearly an issue here — this cannot help the case of grocers. Perhaps some form of breakdown of where consumer spend goes — for every £/$/€100 spent how much goes to suppliers, wages, store running costs, shareholders publicised could be an angle to consider — this has been adopted by some organisations — specifically government in relation to taxation. Displayed prominently in stores could be considered — but it could be considered a brave action by an organisation.