According to the Food Institute, food-at-home prices started falling off their historic midsummer highs during the final two months of 2008, but the inflation rate still topped 6.4% — the highest level since 1990 and 1989's 6.5%, and considerably more than the 3.8% increase in the overall unadjusted inflation rate as represented by the Consumer Price Index. Analysts covering the food industry believe with inflation this high, conventional supermarkets become victims themselves, as consumers seek out cheaper food outlets like dollar, club and price-impact retailers. Likewise, cost inputs are likely to remain a factor during 2009, as manufacturers attempt to recoup earlier losses.
“Food manufacturers have a very good case not to take prices down,” said analyst Scott Van Winkle, of Canaccord Adams, Boston. “They were slow to raise them and suffered the margin pressure first.”
But that isn't stopping supermarkets from pressing vendors to drop wholesale prices — or at least ratchet up promotional spending, coupons and other incentives in order to keep shoppers from defecting to other formats. During a conference call reporting third-quarter earnings last month, Supervalu's chief executive officer, Jeff Noddle, set the tone for what promises to be a combative year.
“We're going to put tremendous pressure on suppliers for [pricing] relief, in terms of those [items] driven by commodities and fuel, and there's going to be reluctance,” he said, referring to manufacturers. “That's the battleground that I foresee.”
Retailers with strong natural and organic private labels might be in a better position to bargain with brand-name vendors by turning to their private-label partners first, according to Van Winkle.
“They can pressure private-label manufacturers to push prices back down, because of the lower commodity costs underlying those products,” he said. “And if you start to see the gap widen between private label and branded, you'll see branded follow suit. Otherwise they'll suffer from market-share losses.”