The majority of retailers (55.1%) polled as part of SN’s fifth annual survey of Center Store performance reported that higher commodity costs have had a fairly significant effect on the retail cost of groceries in their stores. More than one-quarter (26.1%) said food price inflation is impacting shelf prices significantly, 11.6% described the consequence as very significant, and 5.8% categorized it as not significant.
“Margins are getting tighter, with the numerous cost increases from product suppliers,” one anonymous respondent told SN. “The cost of fuel has a big impact on operating and distributing costs. Competition is keen, so the costs don’t immediately reach the consumer segment. But the increasing costs are impacting all retailers.”
Indeed, one participant described input cost pressures as “dramatic. Costs have increased 3% to 8% depending on items. The cost of some [commodities] like grain have increased 16%.” Some are working to stave off retail price increases, while others place greater importance on maintaining profit margins.
“We are very competitive and do not pass on price increases unless we absolutely have to,” noted one respondent. Another reported, “We are directly passing on all cost increases to the consumer and protecting our margins. We will adjust to competition down the road when the cost increases slow.”
In the meantime, retailers must grapple with tough decisions.
“It hurts my gut each time we have to raise prices,” said one retailer polled by SN. “Not necessarily from a financial standpoint, but from a human standpoint. Some people cannot afford to shop here.”
Higher prices coupled with recessionary spending are having either a fairly significant (50.7%) or significant (26.1%) effect on the purchasing habits of shoppers, said more than three-fourths of participants (76.8%). More than one in 10 retailers (11.6%) reported that the factors have affected shopping behavior very significantly, and 10.1% said the result has not been significant. Many noted the emergence of consumer savvy.
“Shoppers are very keen when it comes to rising food prices,” said one retailer. “They simply cut back on amounts purchased, as well as move to smaller sizes and less pricey substitutes.” Another reported “customers are cherry-picking featured items which are loss leaders.” Yet another said, “An increase in consumer traffic is seen when we advertise lower retails on price-sensitive items. More consumers are now attracted to private-label alternatives.”
Retailers stand to benefit from this trade-down phenomenon, since corporate brands draw 12% higher profit margins than those realized on a national-brand item’s sale, according to Willard Bishop’s 2007 Total Store Grocery SuperStudy. Industry observers also note that cost-conscious shoppers are eating out less frequently and turning to the Center Store aisles for ingredients, rather than the ready-made meals that are merchandised around the store’s perimeter.