Grocery Prices Are Plunging
September 27, 2016 — 5:01 AM EDT
· Wal-Mart effect combines with deflation to eat away at margins
· Two-for-one sirloins? How about a nice deal on a wagyu steak?
Call it the Great Grocery-Store Giveaway of 2016.
In Austin, Texas, Randalls slashed prices for boneless beef ribs by 40 percent, to $3.99 a pound. Not to be outdone, the H-E-B grocer down the street charged $1 a pound less. Not long ago, Albertsons advertised a deal you don’t normally see on your finer cuts of meat: “buy 1 get 1 free” specials on “USDA Choice Petite Sirloin Steak.”
And what does $1 buy these days? In North Bergen, New Jersey, you could pick up a dozen eggs at Wal-Mart. OK, the price was actually $1.14. A mile away, check out Aldi, the German supermarket discounter, which can actually break the buck -- 12 eggs for 99 cents. A year ago, you would have paid, on average,three times that price.
In a startling development, almost unheard of outside a recession, food prices have fallen for nine straight months in the U.S. It’s the longest streak of food deflation since 1960 -- with the exception of 2009, when the financial crisis was winding down. Analysts credit low oil and grain prices, as well as cutthroat competition from discounters. Consumers are winning out; grocery chains, not so much. Their margins and, in some cases, their stock prices, are taking a hit.
Eggs and beef have have grown especially inexpensive, and it isn’t only an American phenomenon: In England, Aldi recently offered its prized 8-ounce wagyu steaks from New Zealand for about $6.50 -- a little more than the price of a pint of beer.
“The severity of what we’re seeing is completely unprecedented,” said Scott Mushkin, an analyst at Wolfe Research who has studied grocery prices around the country for more than ten years. “We’ve never seen deflation this sharp.”
Mushkin, who researches local markets, recently found that prices of a typical basket of grocery items in Houston, had fallen almost 5 percent over the past year.
He credits, in part, the discerning behavior of shoppers like Manny Sinclair. On a weekday lunch break, the 43-year-old contractor stopped by a Wal-Mart in Secaucus, New Jersey, to pick up turtle food and paper towels.
Patient Shoppers
Sinclair typically buys groceries at his local ShopRite but has recently noticed the steals he now finds at discounters. He glanced at the meat case, where a 12-pack of “Angus steak burgers” fetched $15.82 and grass-fed ground beef could change hands for $4.96 a pound.
Sinclair was intrigued but, in the classic logic of a shopper in an age of deflation, figured he might find even lower prices elsewhere. Along with two Wal-Marts, a Target and an Aldi, the area even offers a Family Dollar that features a small refrigerated section.
“Wherever I find the good deals -- that’s where I’m at,” Sinclair said.
At first, falling prices helped grocers. Low-cost commodities pushed down the tab for meat and packaged food and boosted profits. Now, deflation has turned ugly for the industry. Led by Wal-Mart, retailers are pushing down prices, eating away at their profit margins.
‘Irrational Pricing’
“It starts to border on irrational pricing,” said Jennifer Bartashus, an analyst at Bloomberg Intelligence. “People are lowering prices just to draw traffic, without thinking about their margins.”
Supermarkets are facing competition not just from Wal-Mart Stores Inc. and Aldi but also dollar stores and online retailer Amazon.com Inc. It could get worse. Lidl, one of Aldi’s German competitors, is building three distribution centers on the East Coast and plans to open U.S. stores by 2018. Even Whole Foods Market Inc. -- famously derided as “Whole Paycheck” -- is trying to compete on price through digital coupons and promotions on items such as beer and produce.
In recent years, Kroger Co. -- the largest grocery store chain in the U.S., with nearly 2,800 stores -- cut prices to compete with Wal-Mart and managed to increase its market share and sales. But deflation has been hard on the supermarket chain. The company’s stock has lost more than a quarter of its value this year, as price cuts weighed on profits. Chief Executive Officer Rodney McMullen expressed frustration that many customers don’t even notice.
CEO’s Lament
“The other thing that’s always hard is getting your message out, because it’s fascinating – in our research, most people are saying their basket of goods costs more money,” McMullen said on a call with analysts this month.
The likely reason for McMullen’s lament: Food, on average, makes up only about 15 percent of a consumer’s budget. Except for gas and other energy-related items, prices for most other goods are going up, if only modestly.
At the same time, restaurant food can still be pricey. The situation makes for some strange contrasts: In Chicago, a pound of Dunkin’ Donuts coffee sells for $4.99 at a Jewel-Osco store, less than the cost of a venti pumpkin spice frappuccino at Starbucks. Albertsons Cos. owns Jewel-Osco, as well as Randalls, home of the cheap Texas ribs.
Elena Rosa, a 63-year-old retired health aide, was blasé when she steered her shopping cart past the refrigerator case at Aldi in North Bergen, New Jersey. She paused, noting a dozen eggs for less than $1 -- one of the great food deals of recent memory.
“That’s a good price,” she said, before moving on without buying a carton.
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