Think the price of food is too high? A pair of supermarket CEOs feel the same way.
Leaders at both Supervalu and Safeway, companies that operate thousands of grocery stores in competition with each other and, increasingly, in competition with Wal-Mart, have seen the falling price of commodities as a call to prod the nation's food manufacturers into lowering prices.
"It's disingenuous to consumers that all commodity costs are coming down, interest rates are coming down, everything is coming down, and they are taking their prices up," said Steven Burd, CEO of Safeway, in a recent call with analysts.
His counterpart at Eden Prairie-based Supervalu, Jeff Noddle, told analysts in January that there is a "battleground" over prices emerging between retailers and manufacturers, which have in large part weathered the economic downturn well, in part, because of price increases.
Supermarkets and their suppliers talk every day about prices, said one insider, but these days those talks are more contentious than ever as retailers argue that cheaper gas and cheaper corn -- among other ingredients -- should translate into cheaper corn flakes and produce.
Yet that's not where grocery bills are headed: Prices will rise 3 to 4 percent this year, say federal government estimates. That follows a 6.6 percent rise in grocery store prices last year, according to the U.S. Department of Agriculture. Taken together, the last two years of food price increases are the steepest since the early 1990s, according to the agency.
A forecast released this week predicts corn, wheat, soybean and rice prices will remain above their historical average since 2000, but not return to the record highs of last summer.
A General Mills spokesman said the company doesn't usually talk about prices, but a company filing last year said that the maker of Cheerios and Yoplait expected to pay 9 percent more this year for its so-called input costs, including corn, wheat and other commodities it uses to make cereal and other foods.
That expectation shaped company price decisions and probably won't be undone immediately as many companies make huge purchases of grain on the futures market to feed their manufacturing plants. General Mills raised cereal prices more than a year ago by shrinking boxes. Prices on other products, including Pillsbury dough products and Green Giant vegetables, have also risen.
The conflict came to a head in Europe, where one leading grocery chain pulled hundreds of Unilever products from its shelves. Grocer Delhaize argued that it couldn't pass along Unilever's high prices to consumers anymore -- and Unilever launched an ad campaign urging shoppers to go to different stores for its products. A survey last month found about 30 percent of the retailer's customers were shopping elsewhere for Unilever products. The two sides ended the dispute Friday, though they didn't release details.
Of course, it's not just the price of corn that determines the price of a bowl of Golden Puffs.
"There are a lot of variables that contribute to the price of a grocery item -- commodities and transportation costs, but also expenses, such as employee health care, taxes, the cost of borrowing money, a number of factors," said Linda Fisher, a spokeswoman for Northfield, Minn.-based Malt-O-Meal. The cerealmaker "is continuously seeking to manage all of those costs so it can keep its everyday prices affordable and less expensive than its national competitors."
And there may be more practical reasons that prices won't drop too fast, said one analyst.
"If a brand starts to drop price, it's usually a negative toward the label. Your perception of the brand can be damaged," said Phil Dobrzynski, of Riverbridge Partners.
Pushing their own
Supermarkets, meanwhile, have their own brands stacked up in their warehouses that could sell faster if national brands don't drop their price, suggested Burd, of Safeway.
He went so far as to warn national brands that they would lose sales to his company's brands if they didn't drop their prices.
Indeed, several supermarket CEOs predict the $74.2 billion private-label industry will grow in coming years, after mixed results recently. Because of price hikes, private-label sales grew 7.6 percent in 2007, while volume sales actually fell 2.2 percent, the most recent data available, according to the Private Label Manufacturers Association. Meanwhile national brands posted a 2.6 percent rise in dollar growth, while volume sales fell 2.6 percent.
Roundy's Supermarkets Inc., parent of Rainbow Foods, plans to stock 6,000 private-label items, a 50 percent increase from current levels.
Supervalu expects private-label items to grow to 18.5 percent of retail sales by the end of fiscal 2010, up from its current rate of 17.3 percent.
Store brands sales are growing at 10 times the rate of national-brand sales, said Mike Witynski, group vice president of store brands at Supervalu. The company hired food scientists and brand managers two years ago and even developed a new building with test kitchens and sampling rooms to kick off a new investment in its own brands. Back then, sales of store brands -- including Culinary Circle, CUB, Wild Harvest and Homelife -- totaled 15 percent of retail sales.
"What's important to us is we want to meet the needs of the customer, and right now they are looking for value," he said.
That's a far cry from two years ago, said another food company executive.
"Everyone was fat and happy and buying out of their box," said Craig Cook, president and owner of Clover Super Foods, a Minneapolis wholesale food distributor.
The high demand of 2007 was partly to blame for food prices rising, he said -- but now that they've come down, some companies may simply need time to recoup their losses from a bruising 2008, when high fuel costs were busting transportation budgets.
"For months and months and months distribution businesses were afraid to implement a fuel charge because typically they wanted someone else to make a move first," he said. "Are they trying to get a little bit of that profit back by lessening the fuel surcharge? You bet they are. It's business 101."
Consumers have turned to coupons for at least some relief, cashing in so many coupons that coupon use has risen faster than at any time since the early 1990s, according to Inmar, a coupon processor based in Salem, N.C. Coupon use grew 10 percent in the last three months of 2008 compared with a year earlier, the group said.
"We buy everything that's on sale," said Lenka Bragg, who shopped Friday at the Lake Street Cub Foods store for her family of four.
Has she noticed any drop in prices?
"Not really."
Source: Minneapolis Star Tribune
