Conditions ripe for grocery prices to go down

There’s good news for consumers feeling the pinch from sky-high grocery bills over the past year — the biggest indicators affecting food shelf prices suggest they won’t get any higher this year, and given the tense rivalry between retailers right now, some prices will actually go down.

The two main factors that drive up food inflation in Canada are commodity prices and grocery competition, and “both factors are not pointing to robust price increases in Canada,” says a report released Thursday from Guelph, Ont.-based food industry research firm Kevin Grier Market Analysis & Consulting Inc.

Relative to recent history, commodity prices are very low right now.

“Over the last four quarters, crop-based prices in Canada have increased by an average of two per cent and decreased by one per cent in the first quarter of 2016,” the report says. In the meantime, animal product raw prices declined by four per cent on average in the past four quarters and by five per cent in the first quarter of 2016.

“The implication, of course, is that there should be downward pressure on meat prices in the second half of 2016. In addition, there is greater potential for declining or at least steady packaged food prices in the second half of 2016.”

While there is a “very strong relationship” between the costs of raw agricultural products such as meat and vegetables and retail grocery shelf prices, Grier notes, there is less of a direct link between crop prices and consumer packaged goods like cookies and ketchup, given the degree of manufacturing between raw commodities and the final product.

Even still, “there is still a strong correlation between crop-based agricultural commodities and packaged food prices lagged by two quarters,” the report says.

On the retail competition side of the equation, a price-based showdown has been simmering for months. After severely undercutting each other on price when Target was operating in Canada, price-based competition between the country’s big supermarket chains eased somewhat in 2015.

“During this time, grocery margins were robust, less intense competition occurred despite ongoing loss of market share to Walmart and Costco,” Grier said.

But this year, Canadian grocery retailers have seen very mixed quarterly results, with Metro coming out on top in its most recent quarter, with five per cent samestore sales growth in the second quarter. “That sent waves through the industry,” Grier said, prompting competitors to “wake up,” and figure out how to better compete with the Quebec-based grocer.