December, 2011

Research Perspective and Comments & Analysis

Higher Food Prices Challenge Retail

By Steven Muro, President, Fusion Marketing


The Rise in Food Prices

As gas and food prices continue to climb, and unemployment faces a slow recovery, shoppers are looking for deals while retailers clamor for sales. It’s tough out there, but now is the time to maintain your brand’s position, especially with escalating food costs and increased competition in the industry.

Fresh produce prices have increased significantly this year. The fresh fruit index is up 7.9 percent and fresh vegetable prices are up 5.9 percent from last year. View the table at right for other fruit and vegetable price increases.

Consumers are feeling the impact of higher food costs. A typical shopper buying his or her Thanksgiving meal probably paid an additional 13 percent increase over last year’s prices. It’s likely, too, that shoppers are noticing the same price for reduced package sizes — a disguised price increase passed onto the consumer. Moreover, shoppers are now finding “sale prices” at the old regular price.

The U.S. Labor Bureau indicates that food prices are rising faster than wages. According to the USDA, food prices for all food will increase 2.5 to 3.5 percent in 2012, and consumer prices for fresh produce are expected to increase at a faster pace. Prices for beef, pork, eggs and dairy products are estimated to rise at a slower rate in 2012. However, the fate of these price predictions will hinge on a variety of factors including weather, fuel prices and the value of the U.S. dollar.

The Shift at Retail

A recent Gallup poll indicated that the percentage of people that said they had enough money to buy food in the last 12 months fell to its lowest level in three years. It comes as no surprise then that consumers are looking for ways to stretch their dollars, especially since approximately 43 percent of shoppers are buying less food and 22 percent are shopping at less expensive stores, including dollar stores.

Dollar stores are benefiting from the newly dubbed “forever frugal” consumers — those who buy only what they need, avoid premium labels, clip coupons and seek lower-priced goods. In fact, Family Dollar, Dollar Tree and Dollar General all rank in the Top 10 of Capital Markets’ list of the fastest growing retailers. It is estimated that the three combined will open 2,400 stores over the next two years. In the past, dollar stores operated in secondary and tertiary markets. As the recession continued, they moved into primary market locations. Additionally, some dollar stores are expanding grocery offerings and some are experimenting with grocery-only concepts, which will create more competition in the shifting retail environment.

The intense pricing competition has triggered Wal-Mart to refocus on its low-price strategy. In an attempt to make shopping more convenient than dollar stores with a one-stop shop approach, Wal-Mart brought back thousands of products previously eliminated from its inventory. The altering retail environment and fluctuating consumer buying behaviors are likely causing other retailers to shift direction, too.  

Many retailers miss their mark by slashing prices to compete in the short term. This may unintentionally reposition their brand, in the mind of the consumer, as being totally price-driven. When consumer confidence improves, the retailers rising to the top will be the ones offering value to their customers or those with the best logistics to continue to be a low-price leader.

There are many ways to communicate value without resorting to a price endgame. Take Whole Foods Market, for example. They may offer discounts, but their strategy is to never compete strictly on low prices. Shoppers value Whole Food’s organic and flavorful foods, and they are willing to pay more for them. Part of its success is based on brand equity. Even with increased food prices, Whole Foods is expected to weather the rising commodity costs and has reported sales growth during the recession.

Clearly, margins and profits are important. Communicating your store as the low-price leader to gain volume can be detrimental if it doesn’t support your brand’s position in the market. When a retail giant competes in the price game, they have solid store logistics and supply chain management in place to offset costs as part of their overarching strategy. However, if everyday low prices don’t fit your retail mantra, don’t dilute your brand by focusing solely on low-bottom prices to stay competitive in the short-term. Strengthen your value by appealing to your core market with key messaging that supports your brand’s value position and image.


Staying True To Brand Identity Isn’t Easy

Sometimes data points deceive.  

When considering inflation, economists typically remove from their calculations food prices and other highly volatile items in an attempt to estimate a “core” inflation. If fresh produce prices rise or fall, it typically has more to do with weather and crop conditions than any fundamental change in produce prices.

When surveys claim things such as that 43 percent of shoppers are buying less food, yet there is no evidence this is so in volume sales at retailers, and when there is a supposed boom at farmer’s markets, CSAs, etc., it is more interesting to think about why consumers would say such a thing in a survey than to think about it as if it were true.

And when certain low cost retailers boom, it may indicate less of a flight to low cost retailing than a shift in market share from a giant such as Wal-Mart, which has lost its way, to competitive formats.

It is also true that sometimes one has to do things to survive in the short term that severely damage a business in the long term. Deep recessions are commonly one of those times. Retail is a business with lots of fixed costs. A 10 percent drop in sales is a catastrophe for most retailers.

If one is an upscale retailer at a moment in time when upscale is either unsustainable for many consumers because of their own financial setbacks or at a time when upscale goes out of fashion perhaps because it is deemed showy, one is faced with a difficult conundrum. If one stays true to one’s brand and image, one will probably sustain short term losses. Now perhaps, being true to one’s brand may also pay off in the long term — though, as famed economist Lord Keynes pointed out, “In the long run, we are all dead.” To put it another way, the question often is whether a company has the financial wherewithal to stay the course or if it needs to improvise in the hope of living to fight another day.

It is important to remember that Whole Foods was forced to raise new capital in the midst of the financial crisis and Great Recession. If it had been unable to raise funds, its future was very uncertain.

Wal-Mart has been gradually surrendering its low price leader reputation. Why it is doing this is unclear. Perhaps the Walton family of today is different from Sam’s family and it is now pushing for the company to maintain profits so it can maintain dividends.

Imagine a dramatic announcement that Wal-Mart was going to suspend its dividend and reinvest that money in price reductions. Imagine that every quarter Wal-Mart pledged to reduce its profit margin to provide better value for consumers. Imagine Wal-Mart announcing that its goal was for every quarter’s profit growth to be less than sales growth. Such gestures, both marketing and substance, might well help Wal-Mart reestablish its low-cost reputation. In the long run, that would be of inestimable value.

Dollar stores are booming, but it is not obvious that consumers suddenly want to shop at smaller stores. Although the recession may have created some real estate opportunities in better locations, the big issue is that Wal-Mart is no longer the low price leader. No amount of marketing will succeed in obscuring that fact.

We would not agree that Wal-Mart is refocused on its low-price strategic position. It is focused on marketing gimmicks to make people think Wal-Mart is low price, not actually being the low price leader.

Look at Wal-Mart’s Christmas price match program. It just promises to match prices, not beat them. It only matches print ad prices, thus allowing stores to undersell Wal-Mart with impunity as long as they don’t run print ads. Then it doesn’t give people their money back, just a Wal-Mart gift card. It is not a sincere effort to beat everyone on price; it is marketing fluff. Wal-Mart knows what prices its competitors are selling at. It should not allow itself to be undersold in the first place — but that would impact margins.

This is really the issue. Everyone can be true to his or her brand values if it doesn’t cost short term money. Only really exceptional companies manage to commit to a brand image and pay the short term price so as to succeed in the long term. Upscale firms mess up their image by implying they are cheap. Value-oriented marketers mess up their image by promoting things that aren’t so — the lowest price.

Shifts in the economy matter, but typically brand meaning can’t shift on a dime, so being true to one’s brand makes a lot of sense. But impatience is easy to summon when money is being lost.