Grocers face tough choices as food inflation outpaces overall rate

Food inflation is expected to outpace the overall inflation rate for the first time in years, forcing grocers to choose between raising prices or cutting already thin margins.

"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]," said Avery Shenfeld, a senior economist at CIBC World Markets.

Shenfeld predicted the Canadian dollar would reach US$1.05 by year-end, erasing the currency advantage that had sheltered Canadians from food inflation.

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He said adding fast-rising gasoline prices and the end of the one-year benefit of the GST cut would result in Canadian inflation averaging 3% in 2009.

David Wilkes, senior vice-president of trade and business development at the Canadian Council of Grocery Distributors, said the situation is different from past downturns.

"We are seeing a structural change in the cost of food," Wilkes said. "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."

Some see rising prices as an opportunity. "Inflation is really a retailer’s best friend; it’s an opportunity [to raise prices], with lots of media out there supporting price increases," said one former retailing executive.

John F. T. Scott, CEO and president of the Canadian Federation of Independent Grocers, strongly disagrees.

"I think that would be extremely inappropriate," Scott said. "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."

He advises grocers to scrutinize their cost structures before passing on increases. "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."

Paul Hunt, president of consulting firm Pricing Solutions, said grocers should educate consumers on why prices are rising.

"Grocers need to be perceived as treating people fairly," Hunt said. "Sending messages as to why it’s happening and how they’re working hard to deal with it is, I think, really important."

One strategy is to highlight savings from cooking at home instead of dining out. A survey by the Gandalf Group found 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," said Marion Chan, director of food and beverage at NPD Group in Toronto.

Scott said this shift presents an opportunity for grocers to promote their prepared foods as an alternative to restaurants.

"The quality of prepared foods at grocery stores is magnificent," Scott said. "It gives grocers an opportunity to educate the consumer that they’ve got a real alternative [to foodservice establishments]."

Hunt suggested grocers could help customers manage bills by steering them toward cheaper staples, like potatoes if rice prices soar.

"If people are willing to change their diets slightly, the grocer can help them manage their food bill and eat healthy," he said.

Chan agreed grocers should help consumers find cost-effective alternatives without compromising quality.

The pressure is already evident in stores. In Cheticamp, N.S., Carl Boudreau bought 25 bags of flour in February anticipating a price hike; the following week, the price for a 10-kilogram bag jumped from $9.99 to $12.99. By May, that brand was unavailable, with the wholesaler citing a worldwide shortage.

A recent report found higher diesel prices are also expected to add to food inflation in the coming weeks.

With files from Canadian Grocer