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Rising Prices Become Food Retailers’ New Best Friend

Rising Prices Become Food Retailers’ New Best Friend

Periodically, SN editors contact a number of supermarket executives and ask them to peer into the future as best they can and describe what conditions are likely to affect upcoming business conditions, and to what effect.

In recent reports of the type, the consensus of opinion has been that the second half of 2006 was a time of strong sales and that strong sales have continued through the first half of this year. Now, it’s predicted, the second half of this year should be strong too (Page 1).

That’s the case despite the fact — or maybe because of it — that many interviewed for this week’s news feature see inflation as the chief feature appearing on the landscape for upcoming months.

Inflation can be friend or foe. If inflation pumps up product procurement costs, but retailers lack sufficient pricing power to pass those increases on the consumers, inflation is a foe.

However, if consumers recognize that retailers have good reason to increase price points, they are more prone to accept increases and pay them. In such a scenario, inflation can be a friend and can be the gateway to increased top lines, even if tonnage isn’t growing much.

Luckily, it seems that the second half of this year will be marked by the friendly type of inflation, the type that’s accepted by shoppers. One executive told SN that he sees little in the way of trading down, as happened a few years ago: “It’s not like the recession of a few years ago, when we saw consumers switching to private-label products to save money. I don’t sense that’s happening now because the brands are hanging in there.” (Whether or not the economy is in a recession now is open to debate, but there’s no doubt prices are going up.)

Just why the industry seems to possess greater pricing power than it did a few years back is something of a mystery. A likely, but not immediately obvious, explanation has to do with fuel costs. The long-running increases in fuel prices is a top-of-mind issue to anyone who operates an automobile, which is virtually all supermarket shoppers.

Moreover, since there is no practical alternative to buying gasoline, almost regardless of its price, shoppers start to get used to paying more for that much-needed commodity.

Once shoppers accept that necessity, it’s not a great inductive leap for shoppers to realize that in a petroleum-based economy such as ours, transportations costs must be increasing for business just as they are for themselves.

To be sure, many shoppers are reacting to higher fuel prices by endeavoring to drive less, and to economize in other ways. Many have decided to eat out less, which trims household budgets in two ways at once. Better yet, such resolves are likely to bring more spending into the supermarket.

One supermarket operator, Stater Bros. Markets, Colton, Calif., has developed a promotion to be used in the second half that’s intended to suggest to shoppers how they can save by shopping at a local supermarket. One theme of the promotion will be: “Save Money. Save Time. Save Gas. Eat at Home.” Another will be, “If the store is in your neighborhood, then we’re on your way home.”

This is opportunistic marketing at its best.