Prof­its are fall­ing as labor and other costs are ris­ing, ex­perts say

USA TODAY US Edition - - MONEY - Zlati Meyer USA TO­DAY

Low food prices and ra­zor­sharp com­pe­ti­tion are cre­at­ing bar­gains for shop­pers — but killing prof­its for gro­cery chains.

Prices of su­per­mar­ket items de­clined 1.3% last year, com­pared to the year be­fore, says the Agri­cul­ture Depart­ment’s Eco­nomic Re­search Ser­vice. It was the first an­nual de­cline since 1967.

Weekly house­hold gro­cery ex­penses in 2016 were $107.34, ac­cord­ing to the Food Mar­ket­ing In­sti­tute, which rep­re­sents close to 40,000 re­tail food stores and 25,000 phar­ma­cies.

“It’s cre­ated a price war among ev­ery­body. This is great news for con­sumers, but bad news for busi­nesses who sell food,” said Phil Lem­pert, a su­per­mar­ket an­a­lyst who is the founder of su­per­mar­ket­, a web­site track­ing in­dus­try news and trends.

At the same time, su­per­mar­kets are de­stroy­ing their profit mar­gins as they fight for new shop­pers — and fight off deep dis­coun­ters like Wal­mart and on­line sell­ers.

It be­comes a spi­ral. As food prices fall, re­tail­ers be­come more ag­gres­sive in try­ing to sell higher vol­umes in or­der to main­tain rev­enue.

“To do that, they’re put­ting things on sale and get­ting peo­ple into the store and hope­fully sell­ing them more quan­tity,” says Jon Stringer, re­tail editor at Su- per­mar­ket News. “As long as sales are grow­ing, you’re able to get a lit­tle more out of fixed costs.” Weg­mans, a 92-store re­gional su­per­mar­ket chain based in Rochester, N.Y., re­cently low­ered prices on or­ganic ba­nanas from 69 cents a pound to 59 cents a pound. An 18-ounce jar of Weg­mans house-brand peanut but­ter fell in price from $1.99 to $1.49. Prices on 40 key items, in­clud­ing beef, dairy and eggs, fell as well.

Weg­mans ex­ec­u­tives say they had no choice.

“For us to be com­pet­i­tive, we’ve al­ways had a com­mit­ment to our cus­tomers to have the low­est prices on prod­ucts fam­i­lies use the most,” ex­plained Tom DiNardo, the chain’s se­nior vice pres­i­dent of sales and mar­ket­ing. “Ev­ery­body who sells food is our big­gest com­peti­tor.”

Costco has cut some of its food prices as much as half. A car­ton of 18 ex­tra-large eggs was $3.61 last year. It came down to $1.79. A three-pound bag of Kirk­land Sig­na­ture pis­ta­chios was $19.99. It fell to $14.99; Arm & Ham­mer liq­uid laun­dry de­ter­gent came down to $10.99 from $15.79.

Price de­fla­tion was to blame, ac­cord­ing to CFO Richard Galanti.

“As com­pared to 12 months ear­lier across all of our U.S. in­ven­tory on a cost, not sell, ba­sis, on like items, the av­er­age de­fla­tion­ary amount was slightly over half a per­cent, closer to 1% on foods,” he ex­plained.

One of the largest su­per­mar­ket chains in the coun­try, Cincin­nat­i­based Kroger, just ended a 13year streak of quar­ter-over-quar­ter higher sales at stores open at least a year. It blamed lower food prices.

Yet at the same time, Lem­pert says, labor and other costs were ris­ing, thin­ning prof­its, “and that’s ev­ery­one from Kroger to Whole Foods.”

Meat, chicken and eggs have seen the big­gest cuts be­cause of over­sup­ply and lower-than-ex­pected ex­ports. Ac­cord­ing to the USDA, agri­cul­tural ex­ports dropped by $17 bil­lion or ap­prox­i­mately 11% be­tween 2014 and 2015.


Cus­tomers wait in line at a Kroger in De­catur, Ga. Su­per­mar­ket prices fell 1.3% last year, the first an­nual de­cline since 1967.


Weg­mans says it has had no choice but to lower the cost of its food: “Ev­ery­body who sells food is our big­gest com­peti­tor.”

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