Monday, March 20, 2017

Food deflation and competition hurting supermarket profit margins

A story this morning in USA Today reported that "low food prices and razor-sharp competition" are putting a serious dent into grocery chain profits. However, the issue is good news for consumers, who last year saw the first annual decline in supermarket prices since 1967.

According to Supermarket Analyst Phil Lempert, the low food prices and competition have created "a price war among everybody." This price war, combined with supermarkets' efforts to attract new customers (mainly via investments in pricing), have badly hurt profit margins.

According to the Agricultural Department's Economic Research Service, prices of supermarket items declined 1.3% in 2016 compared to the year before. The article cites confirming evidence from Wegmans and Costco, both of whom provided examples of recently lowered prices on items like bananas, peanut butter, eggs, pistachios and laundry detergent, among others.

The USDA said that meat, chicken and eggs have seen some of the biggest price cuts due to oversupply and lower than expected exports.

Kelly Bania, a senior analyst at BMO Capital Markets, added that "we're definitely in a prolonged deflationary period."

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