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Retail sees first inflationary month since late 2015

Grocers with limited exposure to Kroger, Walmart most likely to capitalize

Retail food-at-home pricing is on the rise for the first time in 19 months, The Food Institute reported today.

The latest Consumer Price Index found a 0.3%climb in July. The increase ends what had become the longest period of deflation since a stretch between 1948 and 1950.

Though upward trending prices may be a welcome sight for some in the industry, Wall Street analyst and Managing Director at Barclays Investment Bank Karen Short advised that much of the sector should proceed with caution.

“While some may celebrate the return of inflation, we continue to believe that ‘the inflation trade’ could disappoint for retailers that have material overlap with Walmart and Kroger,” said Short in a recent report.

“We think Walmart’s aggressive retail pricing (and Kroger’s response) could limit the upside to food retail prices in these markets. As a result, we view retailers with East Coast dominance and retailers with significant, direct Walmart and Kroger overlap as being worst positioned for when inflation returns.”

Short continued, saying that retailers with limited exposure to Kroger and Walmart in their trade areas, such as the Western United States, would be best positioned to benefit from inflation.

She included Whole Foods, Sprouts Farmers Market and Smart & Final Stores as likely winners.

Chuck Cerankosky, an analyst for Northcoast Research, agrees that inflation may hinder bottom lines.

"We have written about the overcapacity in the industry causing shelf price competition, as opposed to deflation being the problem. I think deflation is a non-event,” he said, discussing industry consolidation.

“Retailers can put whatever price they want on the shelf, and if it’s not moving, they’ve got to cut prices,” he added. "When you have inflation on the cost of goods in the same competitive environment, it’s even worse.”

Even for retailers who may benefit from inflationary conditions, the hangover from harder times can linger.

“Lingering deflation contributed to what we view as one of the most difficult operating environments in food retail that we can recall,” Short’s report said.

The rising prices in retail follow on the heels of wholesale’s recent trends, which tipped toward inflation five months prior after a 22-month layoff.

The Food Institute believes this signals a continuation of inflationary prices on the retail side.

Contact: [email protected]

Twitter: @DanAMX

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