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As Food Prices Rise, How Will Retailers Respond?

As Food Prices Rise, How Will Retailers Respond?

I quite doubt that we will start to see television commercials that tout “we've raised the prices on over 6,000 items just for you”; however, the supermarkets that ran with the opposite message just a year or so ago are now about to pay the price.

Not just the price on the foodstuffs lining their shelves, but the price of consumer confidence. More on that later.

The reality is that many food prices, due to late plantings, weather conditions and natural disasters, are on the way up. Many retailers have elected to hold pricing and absorb the difference, but for how long? The Food Institute, who tracks the differences between wholesale and retail food prices, reports that retail food prices (as reflected by the government's Consumer Price Index for food-at-home) were unchanged from a year ago during May 2010 — but the comparable index for wholesale food prices was up 5.7%. That's the widest span between the two indexes in 15 years; and the indication is that retailers are not passing along the increases in food prices they are paying. Not a surprise, as many retailers are treading lightly after seeing how their shoppers quickly discovered and shopped at other retailers since the downturn, seeking out bargains. Store loyalty and even location moved aside as pricing became the ultimate goal.

A recipe for disaster is in the making, unless we see a quick decline in wholesale pricing. Two commodities, beef and pork, represent 11% of the typical retail, or food-at-home, market basket.

  • The wholesale pork price index during May was up 289% from the same month last year, while retail pork prices were up only 2.4%.

  • Beef wholesale prices were up an average 14.5% from a year ago while retail prices advanced only 3%.

Who's going to cover the spread?

Ultimately it must be the consumer; otherwise we will see even more stores shuttered as they fight to be the lowest price leader in their market. An occurrence we have seen too many times. The issue is how we communicate these price increases. Yes, communicate them — not just raise prices with the hope that the consumer won't notice (because they ALWAYS do anyway!).

Our shoppers are smarter than ever, and with the tools at their disposal — especially the latest series of “apps” that can compare food prices and store circulars from their mobile device without even entering a store. They read news reports and understand how natural conditions and disasters can affect them, such as what impact the Gulf oil spill will have on oyster and clam supply and prices. It is a new consumer who is empowered and cannot be fooled.

Those retailers who are proactive and talking about why prices are on the rise will be the ultimate winners. Not just in sales, but in consumer confidence.

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Phil Lempert is contributing editor of Supermarket News and CEO of The Lempert Report and He is a well-known author, speaker and media personality focusing on topics such as consumer behavior, marketing trends and new products.