From the Archives: Grocers can help soothe the sting of high food prices
This article is from the June/July 2008 issue of Canadian Grocer. Please note that the information is out of date, but you might still find it interesting. We're re-publishing select stories from our archives in recognition of Canadian Grocer’s 140th anniversary. For today’s news, subscribe to our free daily newsletter and follow us on LinkedIn.
One chilly day in February, Carl Boudreau emerged from the Co-op store in the village of Cheticamp, N.S. with 25 10-kilogram bags of hisfavourite brand of flour, each sold at $9.99. His daughter operates a small bakery in a nearby town, and Boudreau suspected that price increases were in the offing, which is why he stocked up.
Boudreau’s hunch proved correct; the following week, the price soared to $12.99. By mid-May, that brand of flour was no longer available. The wholesaler had not only substituted another brand but was restricting the store to 20 per order on all 10-kilogram flour, citing “a worldwide shortage.”
Similar scenarios are playing out in supermarkets across the country, leaving grocers stuck: do they try to hold the line on prices to maintain market share, shaving even more from their already razor-thin margins?; or do they raise prices—and perhaps the ire of their customers?
Until recently, Canadians were sheltered from food inflation by the 17% year-over-year appreciation of the loonie, says Avery Shenfeld, a senior economist at CIBC World Markets. But with the dollar expected to reach US$1.05 by year-end, according to Shenfeld’s prediction, that advantage will evaporate.
“If, as we expect, food inflation is running at 3.5% in 2009, as opposed to only 0.4% today, that will add about half a percent to the CPI [Consumer Price Index],” says Shenfeld. “Tack on fast-rising gasoline prices and the end of the oneyear benefit of the GST cut and Canadian inflation will average 3% in 2009.”
For the first time in years, food inflation rates will outpace the overall inflation rate.
From today: Grocery prices moderate as inflation rises to 3.1%
Lasting effect
It looks like higher prices are here to stay. “This [situation] is a little different from previous recessions or economic downturns,” says David Wilkes, senior vice-president, trade and business development, Canadian Council of Grocery Distributors,“because we are seeing a structural change in the cost of food. So even when the economy turns back up, as economies pretty much always do, we’re still going to be at a higher price point.”
Not all grocers see that as a bad thing. As one former retailing executive put it: “Inflation is really a retailer’s best friend; it’s an opportunity [to raise prices], with lots of media out there supporting price increases.”
But John F. T. Scott, CEO and president of the Canadian Federation of Independent Grocers, disagrees. Scott is adamant that grocers not use the soaring price of commodities as an excuse to raise prices across the board.
“I think that would be extremely inappropriate,” he says. “Retailers need to be seen as the advocate and on the side of the consumer...to find every means possible to minimize any price increase.”
From today: Discount grocery a ‘long-term shift,' Loblaw CEO says
Before raising prices or passing along major price increases, Scott advises grocers “take another look at their cost structure to see how they can minimize variable costs in their system, whether it be labour, energy, or supply-chain efficiencies.”
Easier said than done, he concedes, noting that grocers are already running pretty lean.
“There will be price increases; we know that, but to the degree that you can mitigate the impact on the shelf price, that’s in your best interest.” When the consumer is worried, as they are now, “it’s the time for institutions or companies that they believe in, like our grocers, to come to the fore and say: ‘Yes, you can trust us.’”
Paul Hunt, president of Pricing Solutions, a division of Toronto-based consulting firm The Advantage Group, agrees.
“There’s not a lot grocers can do [about rising prices], but I think they can educate consumers on why prices are going up. Grocers need to be perceived as treating people fairly. Sending messages as to why it’s happening and how they’re working hard to deal with it is, I think, really important.”
Soothing the sting
There are several ways grocers can help take the sting out of higher prices for consumers. For one, food inflation will cause most people to curb spending in restaurants and cook more meals, so make it seem like they’re saving money by shopping in your store.
According to the Food Marketing Institute’s 2008 U.S. Grocery Shopper Trends report, 71% of respondents said they were cooking more at home and eating less often at restaurants. Similarly, a recent survey by Gandalf Group for the Toronto advertising agency Bensimon Byrne revealed more than 40% of respondents planned to cut back on restaurant meals.
“Based on what happened in the mid to late ’90s, when we were in a similar situation, people tend to go out less; they will try to eat at home more; and they will trade down in terms of the types of food they’re eating,” says Marion Chan, director, food and beverage, NPD Group, Toronto. “So instead of having prime rib, they’ll have pot roast; instead of having a gourmet coffee, they’ll have a plain coffee. A lot of premium products tend to be consumed less, and the less-expensive options get a bit more attention.”
From today: Canadians in 'survival mode' as food expenses rise, report finds
With consumers less able to afford restaurant meals, people will turn to prepared foods for an economical break from cooking.
“I think grocers are going to have an opportunity as consumers trade down and say, ‘I can’t afford that restaurant any more, but I’d still like to go out to eat,’” says Scott. “The quality of prepared foods at grocery stores is magnificent. It gives grocers an opportunity to educate the consumer that they’ve got a real alternative [to foodservice establishments]. This is going to be, I think, a big part of the future.”
Offering tips
Hunt suggests grocers educate consumers on how to change their eating behaviour in ways that will reduce their grocery bill. If, for instance, the price of rice is going through the roof but potato prices are more or less flat or even down a bit, grocers should steer customers in that direction.
“If people are willing to change their diets slightly, the grocer can help them manage their food bill and eat healthy,” he says. Similarly, Holt suggests grocers publish a “Top 10 tips for controlling your grocery bill,” consisting of practical cost-cutting ideas. Wal-Mart, for example, recently launched a website titled Save More that features tips to help consumers stretch their dollar.
Chan agrees that grocers can “point out some cost-effective alternatives,” rather than trying to hold pricing at unrealistic levels. “I think [grocers] should help the consumer in developing ideas on how to be more cost-conscious, but at the same time, not compromising on quality.”
She recommends promoting less-expensive cuts of meat at their regular price but showing consumers tasty ways to cook with them, such as using store-bought marinades.
Scott also advocates “buy local” promotions to counter rising prices. Local product will be cheaper, he says, because input costs and transportation costs are lower. “So you’re immediately providing a product to your consumer that you’re acquiring at a cheaper price. You can maintain or lower your price on those products to the consumer.” Furthermore, he adds, “consumers are looking for local product. They believe in it.”
“Whoever can be perceived as working hard to help the consumer during this disruption and level of turbulence is going to gain a favourable image with consumers,” says Hunt.
In other words, the enterprising grocer will turn lemons into lemonade.
