With food-cost inflation on the rise — a trend that is expected to continue in 2011 — food retailers are beginning to get a sense of whether or not customers will accept higher shelf prices.
“The retailers that are in the best position are the ones that have established what I would call ‘value credentials’ during the downturn and early part of the recovery,” said Chuck Cerankosky, an analyst with Northcoast Research, Cleveland. “Customers already trust those chains' pricing, and may be more likely to accept the cost of goods pass-through in those venues.”
By contrast, those food retailers that have been losing market share in the downturn because of weak price positioning might feel the biggest impact from the rising input costs, he explained.
Last week Austin, Texas-based Whole Foods Market expressed confidence in its ability to pass along some food-cost inflation to customers, at least in the near term.
“I think it is a concern for the back half of the year, and we're just going to have to see how that plays out in the marketplace,” said Walter Robb, co-chief executive officer, Whole Foods, in a conference call discussing first-quarter results. “The competitors are behaving very rationally right now.”
In a report issued last week, investment bank Goldman Sachs said increasing commodity costs have led the company to rethink its outlook for both food suppliers and food retailers. While it had previously projected suppliers to experience a 5% to 6% increase in their input costs in 2011, it now expects that increase to be about 10%, most of which is likely to be passed on to retailers.
“We believe manufacturer attention will now shift to driving gross-profit dollar growth with an acceptance of likely margin pressure,” the report stated, estimating that 3% to 4% gross profit growth would require price increases of about 6% for the companies it follows.
The report came as several supplier companies outlined plans for price increases across a range of goods.
Goldman also said it has revised its outlook for Safeway and Kroger to include more gross margin compression in the second half of the year, reflecting higher product costs. It said other retailers, including Whole Foods and The Fresh Market, would not be impacted.
In an earnings report earlier this month, Spartan Stores, Grand Rapids, Mich., said so far it has been able to pass along “modest” cost inflation in low single digits.
“As we've had some [cost increases] that we've had to pass on, it seems like they've gone pretty well,” said Dennis Eidson, president and CEO, noting that historically customers have been more accepting of price increases on fresh items, which have experienced recent cost increases.
He said it was too soon to determine what impact inflation was having on volumes at independent customers of the company's wholesale operations.
Cerankosky said food retailers overall need to be concerned about a decline in unit volume if customers reject shelf-price increases.
“The biggest issue with food inflation, with a slowly recovering economy, and employment levels remaining low, is what it does to unit sales,” he said. “Everybody wants to pass it on, and some may be forced to pass it on, but other chains are still going to be looking at building volume.”
