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 every day 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.