Grocery prices heading lower amid toughening competition
Traditional supermarkets continue their battle with Walmart, Costco
Grocery prices declined in September, and that was likely due more to traditional supermarkets’ ongoing battle with Walmart and Costco than it was to food deflation, according to a new report.
The prices of food purchased from stores declined by 0.9 per cent in Canada in September, according to Statistics Canada, and in particular, consumer packaged goods were almost “universally discounted,” according to research from Kevin Grier Market Analysis and Consulting Inc.
Consumer packaged goods prices fell by 1.3 per cent in September, the Guelph, Ont.-based food analyst noted, compared with a drop of less than one per cent for food as a whole.
The packaged goods drop is key, Grier noted: Given that commodity prices and competition are the two main drivers affecting retail food pricing, the price dip in centre-of the-grocery store items such as cereal and canned goods likely occurred because retailers such as Loblaw and Sobeys are trying to claw back market share from the mass merchants who are taking up an increasing portion of their traditional turf.
“With regard to items such as margarine, coffee and condiments, there is no obvious or compelling commodity-related reason for pricing to be down at retail,” unlike declines in beef and pork after meat went though a period of drastic inflation last year, Grier wrote in an analysis published this week.
“There are also declines in the prices of processed fruits and vegetables, as well as tea, bakery and even dairy products. The factor of grocer competition is the best explanation for the pricing action in these areas.”
Packaged goods are more divorced from direct pricing than meat and produce, and “as such, the direction of those items is a good gauge of (industry) competition,” Grier said. “The only way for grocers to compete in those products is through price.”
During the third quarter, he noted, Walmart’s flyer pricing sharpened as the prices at grocery stores began to dip. Loblaw, the country’s largest grocery retail chain, sent a letter to its largest suppliers in July asking them to cut costs to help the retailer offer lower prices to inflation-weary consumers. Other chains are reported to have followed suit.
The news comes as grocery retailers have been trying to hold on to their market share in the face of increasing food retail success from Walmart and Costco.
In the second quarter, grocery retailers’ market share rebounded slightly to 78 per cent of the industry after falling to a record low of 76 per cent in the fourth quarter of 2015. But Grier notes that while grocery retailer’s food sales were 3.8 times greater than general merchandisers’ food sales in the second quarter of this year, six years ago in the second quarter of 2010, grocers’ food sales were 6.3 times greater than general merchandisers’ food sales and Walmart and Costco’s food growth has been outpacing the traditional chains for years.
Between 2004 and 2015, grocery retailers’ food sales have increased at a compound annual rate of just over three per cent. The general merchandise channel’s rate of growth for food sales was 11.6 per cent. That could be slowing: In the second quarter of 2016, food sales from supermarkets rose by one per cent compared to the second quarter of 2015. That compares with a three per cent rise in food sales through the general merchandise channel.
The factor of grocer competition is the best explanation for the pricing action in these areas.