FINANCIAL POST
GOOD NEWS FOR GROCERS: FOOD DEFLATION IS SLOWING.
• Grocery basket price deflation appears to be tapering and that is good news for Canadian food retailers, according to two industry reports.
While March results suggest grocery deflation continued in the industry, the level of deflation was lower than February’s, analyst Peter Sklar of BMO Capital Markets wrote in an analysis published Monday. BMO’s grocery basket survey predicts that Statistics Canada will report grocery deflation of less than 4 per cent for the month of March, Sklar said. Statistics Canada reported February deflation of 4.1 per cent in its Consumer Price Index of food purchased from stores, and the agency is set to release CPI data for March on April 21.
Food prices began going down in the U.S. in December 2015, and in Canada the deflationary food trend started about three quarters later in September 2016. If lower food prices are passed on to consumers, food price deflation can be seen as partly beneficial, but it weighs on the profits of grocery retailers because their sales and general and administrative costs typically continue to increase.
Canada’s grocery market became significantly more price- competitive prior to and in the deflationary period that began last year. Walmart, Loblaw, Metro and Sobeys lowered shelf prices in selected categories amid an ongoing market share battle that has intensified with the rising grocery sales at Costco and Walmart in Canada, but that too could be letting up.
“The trend we observed in February of Loblaw cutting prices more significantly than other grocers on a month-over-month basis appears to have run its course in Toronto and Montreal in March,” Sklar wrote. “Overall, we believe that the smaller magnitude of deflation in March is a positive development for the Canadian grocers, and there has been some modest level of recovery in grocery prices on a monthover-month basis.”
Produce was the primary driver of deflation in both discount banners and conventional grocery stores, Sklar added.
While he expects grocery prices will still experience “significant” deflation in March, it will be less than in January and February, Sklar said. “We continue to believe that deflation could endure through the third quarter of 2017 before returning to modest inflation in the fourth quarter of 2017. However, if sequential basket pricing continues to increase, the first quarter of 2017 should be the peak deflationary quarter.”
Keith Howlett, retailing analyst at Desjardins Securities in Toronto, said in a report Monday that food price deflation in the U. S. also appeared to have moderated in March: grocery price deflation at stores was 0.9 per cent in March, compared with deflation of 1.7 per cent in February, while restaurant or “food- away- from- home” experienced inflation of 2.4 per cent.
“If current food- at- home pricing momentum continues, the U. S. is likely to return to food- at- home inflation in the near term,” Howlett said in the report. If prices increase by rough- ly 0.02 per cent year over year for three consecutive months, inflation will reappear in June, the analyst predicts.
This is significant for Canada and Canadian grocery retailers, Howlett said, “because the agricultural and food industries of Canada and the U. S. are, generally speaking, integrated,” with the exceptions being the supply- managed categories of dairy and poultry in Canada.