Grocery Prices Are Plunging
September 27, 2016 — 5:01 AM EDT
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Wal-Mart effect combines with
deflation to eat away at margins
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Two-for-one sirloins? How about a
nice deal on a wagyu steak?
Call it the Great Grocery-Store
Giveaway of 2016.
In Austin, Texas, Randalls slashed
prices for boneless beef ribs by 40 percent, to $3.99 a pound. Not to be
outdone, the H-E-B grocer down the street charged $1 a pound less. Not long
ago, Albertsons advertised a deal you don’t normally see on your finer cuts of
meat: “buy 1 get 1 free” specials on “USDA Choice Petite Sirloin Steak.”
And what does $1 buy these days? In
North Bergen, New Jersey, you could pick up a dozen eggs at Wal-Mart. OK, the
price was actually $1.14. A mile away, check out Aldi, the German supermarket
discounter, which can actually break the buck -- 12 eggs for 99 cents. A year
ago, you would have paid, on average,three times that price.
In a startling development, almost
unheard of outside a recession, food prices have fallen for
nine straight months in the U.S. It’s the longest streak of food deflation
since 1960 -- with the exception of 2009, when the financial crisis was winding
down. Analysts credit low oil and grain prices, as well as cutthroat competition from discounters.
Consumers are winning out; grocery chains, not so much. Their margins and, in
some cases, their stock prices, are taking a hit.
Eggs and beef have have grown especially
inexpensive, and it isn’t only an American phenomenon: In England, Aldi
recently offered its prized 8-ounce wagyu steaks from New Zealand for about
$6.50 -- a little more than the price of a pint of beer.
“The severity of what we’re seeing
is completely unprecedented,” said Scott Mushkin, an analyst at Wolfe Research
who has studied grocery prices around the country for more than ten years.
“We’ve never seen deflation this sharp.”
Mushkin, who researches local
markets, recently found that prices of a typical basket of grocery items in
Houston, had fallen almost 5 percent over the past year.
He credits, in part, the discerning
behavior of shoppers like Manny Sinclair. On a weekday lunch break, the
43-year-old contractor stopped by a Wal-Mart in Secaucus, New Jersey, to pick
up turtle food and paper towels.
Patient Shoppers
Sinclair typically buys groceries at
his local ShopRite but has recently noticed the steals he now finds at
discounters. He glanced at the meat case, where a 12-pack of “Angus steak
burgers” fetched $15.82 and grass-fed ground beef could change hands for $4.96
a pound.
Sinclair was intrigued but, in the
classic logic of a shopper in an age of deflation, figured he might find even
lower prices elsewhere. Along with two Wal-Marts, a Target and an Aldi, the
area even offers a Family Dollar that features a small refrigerated section.
“Wherever I find the good deals --
that’s where I’m at,” Sinclair said.
At first, falling prices helped
grocers. Low-cost commodities pushed down the tab for meat and packaged food
and boosted profits. Now, deflation has turned ugly for the industry. Led by
Wal-Mart, retailers are pushing down prices, eating away at their profit
margins.
‘Irrational Pricing’
“It starts to border on irrational
pricing,” said Jennifer Bartashus, an analyst at Bloomberg Intelligence.
“People are lowering prices just to draw traffic, without thinking about their
margins.”
Supermarkets are facing competition
not just from Wal-Mart Stores Inc. and Aldi but also dollar stores and online
retailer Amazon.com Inc. It could get worse. Lidl, one of Aldi’s German
competitors, is building three distribution centers on the East Coast and plans
to open U.S. stores by 2018. Even Whole Foods Market Inc. -- famously derided
as “Whole Paycheck” -- is trying to compete on price through digital coupons
and promotions on items such as beer and produce.
In recent years, Kroger Co. -- the
largest grocery store chain in the U.S., with nearly 2,800 stores -- cut prices
to compete with Wal-Mart and managed to increase its market share and sales.
But deflation has been hard on the supermarket chain. The company’s stock has
lost more than a quarter of its value this year, as price cuts weighed on
profits. Chief Executive Officer Rodney McMullen expressed frustration that
many customers don’t even notice.
CEO’s Lament
“The other thing that’s always hard
is getting your message out, because it’s fascinating – in our research, most
people are saying their basket of goods costs more money,” McMullen said on a
call with analysts this month.
The likely reason for McMullen’s
lament: Food, on average, makes up only about 15 percent of a consumer’s
budget. Except for gas and other energy-related items, prices for most other
goods are going up, if only modestly.
At the same time, restaurant food
can still be pricey. The situation makes for some strange contrasts: In
Chicago, a pound of Dunkin’ Donuts coffee sells for $4.99 at a Jewel-Osco
store, less than the cost of a venti pumpkin spice frappuccino at Starbucks.
Albertsons Cos. owns Jewel-Osco, as well as Randalls, home of the cheap Texas
ribs.
Elena Rosa, a 63-year-old retired
health aide, was blasé when she steered her shopping cart past the refrigerator
case at Aldi in North Bergen, New Jersey. She paused, noting a dozen eggs for
less than $1 -- one of the great food deals of recent memory.
“That’s a good price,” she said,
before moving on without buying a carton.
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