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."

Whole Foods opens first membership-only wellness club

Back in February we learned that Whole Foods was planning to open Wellness Clubs in select stores. Last week, USA Today reported that the first club opened in Dedham, MA, and additional sites are coming soon at Whole Foods locations in Princeton, Manhattan (Tribeca), Chicago and Oakland.

The membership-only clubs will cost $45 per month plus a one-time fee of $199. Members will have access to lifestyle evaluations (I assume shopping at Whole Foods will garner initial high marks) and access to nutrition, cooking and health classes. They will also get discounts on 1,000 "better-for-you" foods sold in the stores.

Whole Foods Founder and Co-CEO John Mackey says 10 additional Wellness Clubs could be rolled out in 2012 if the first five are successful, and the program could go national in 2013.

There is no doubt other retailers will pay close attention. If Whole Foods finds the program successful - meaning that thousands of customers forked over $739 for the service in year one - similar programs are bound to pop up at other retailers who are health conscious, or at least want to be.

Target CEO provides his take on PFresh

In a recent interview for USA Today, Jayne O'Donnell asked Target CEO Gregg Steinhafel to describe the PFresh concept. Here's what Steinhafel had to say.

"PFresh is a comprehensive remodel within our stores' environment that does a number of things. It adds a much larger assortment of dry, dairy and frozen, then we add fresh perishables to the grocery mix, which is something we haven't had in the past. While we're in and remodeling, we update the entire store and add new visual elements throughout, update apparel racks, add a new shoe area, add new beauty and skin care areas and update our electronics area. Essentially, when we're through with the remodel, we have a brand new Target store. We're transforming the experience in these stores so that we can provide a more comprehensive one-stop destination. We didn't have a broad enough assortment of groceries. Our prices are ultra-competitive, and in most cases, they are below the local grocer retail prices."

As for new stores, Steinhafel expects 20 (net 15 with closings and relocations) this year.

Previous blog posts about Target:

Target has big increase in grocery sales (5/6/2011)

Target sets more food expansion (2/25/2011)

Target's grocery format is gearing up for growth (1/4/2011)