Conundrum: Falling Retail Prices, Price Wars

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Conundrum: Falling Retail Prices, Price Wars

07/18/2017

Supermarkets, faced with price deflation, increased competition and an evolution in the types of products being sold at retail, are encountering a situation that's complex and risky. Kroger’s CEO, Rodney McMullen, who saw the company's stock price drop almost 20 percent in mid-June after a 13-year run of increasing same-store sales every quarter, has been quoted as saying, "The next five years will be more competitive than the last five."  In mid-June, he announced that Kroger will be slashing prices to stay competititve. 

As of April 2017, the U.S. shopper was enjoying the 17th consecutive month of falling supermarket food prices and helped compensate for the overall rise in prices -- the consumer price index rose 2.4 percent in the 12 months to March 2017. 

We’ve talked before about price deflation, for which there are three basic causes: 

  • A surplus in agricultural production for a range of commodities, including dairy products such as milk and cheese, as well as meat and eggs.
  • A stronger dollar means fewer exported foods, which has added to the surplus and makes food imports less expensive. About 15 percent of the total U.S. food supply is imported, but half of our fruits and one-fifth of our vegetables are imports. 
  • Increased retail competition – Lidl, Aldi, Walmart and now Amazon’s acquisition of Whole Foods Market have created a new pricing paradigm that conventional supermarkets are struggling to understand and compete with, resulting in many retailers, like Kroger, lowering prices to increase store traffic. 

For national brands, these factors have produced an environment in which retailers are fighting back to lower prices, and the threat of more private-brand growth and promotions is creating a no-win situation.

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