Is a grocery price war inevitable?
Image: Kroger

Is a grocery price war inevitable?

Driven largely by food deflation, some Wall Street analysts are predicting a highly promotional climate to lead to several quarters of depressed earnings for the grocery channel.

As in the past, deflationary pressures are expected to drive grocers to pass along any savings possible to consumers to stay competitive and hopefully gain market share.

“The current landscape is now beginning to look a lot like 2009, when meaningful deflation resulted in an industry price war and multiple quarters of declining earnings,” Credit Suisse analyst Edward Kelly said last week in an investor note. He noted that the “price war of 2009/2010 carried on for three to four quarters before abating.”

The price of food bought from grocery stores in July plunged 1.6 percent versus July 2015, the eighth consecutive month of declines, the sharpest since January 2010, and the largest one-month decline since 2010, according to the U.S. Department of Agriculture.

A Wall Street Journal article notes that the U.S. is on track to show its longest stretch of falling food prices since 1960. The trend is being attributed to an excess supply of dairy products, meat, grains and other staples; weaker demand for overall commodities from China due to the strong dollar; as well as lower energy costs for transportation and refrigeration. Moves by Walmart to slash food prices earlier this year and the expansion of low-price chains such as Aldi and dollar stores are exacerbating the pricing pressures.

Last week, Kroger, Supervalu and Sprouts Farmers Markets lowered their full-year guidance due to price deflation and heightened competition

Kroger, the world’s third-largest retailer behind Walmart and Costco, warned that deflation in food prices could persist into next year. On a conference all, however, Kroger officials noted the importance of freshness, variety and customer service.

“I think it’s always incredibly important for us to remember, and this is as much inside the company as external, is the customer decides where to shop, and price is only one element of that decision,” said Kroger’s CEO Rodney McMullen.

BrainTrust

"I don’t foresee the industry changing its approach during the current deflationary cycle. "

Steve Montgomery

President, b2b Solutions, LLC


"... the pruning of product lines and re-calibrating shelf allocation and promotional approaches can have a “Hawthorne Effect” on consumers ..."

Lyle Bunn (Ph.D. Hon)

Strategy Architect – Digital Place-based Media


" The macro reasons for deflationary pricing will be largely beyond grocers’ control. Run to strengths, manage weaknesses."

Roger Saunders

Global Managing Director, Prosper Business Development


Discussion Questions

DISCUSSION QUESTIONS: Is it more or less important that food retailers focus on gaining market share during deflationary periods? What management tips would you have for grocery retailers navigating through deflation periods?

Poll

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Ori Marom
Ori Marom
7 years ago

It is important to note that the deflationary pressure comes from the supply-side (as the article mentions) as well as the demand-side. The median income in most Western countries (including the U.S.) has stagnated over the last decades leading many consumers to shop for cheaper food than in the past.

What we have seen is that the mid-range of grocery chains has suffered the most. This is mostly a result of a downward shift of demand towards food discounters. This shift has also lead to increased deflationary pressures on commodity prices as discounters compete on price alone and thus are very tough buyers.

The strategic implications for mid-range chains like Kroger are clear. They should move down market and reduce overall quality in response to shifting consumer demand. Smaller chains could consider moving upmarket to cater for the growing (but still very small) upper class. The mid-range is becoming very dangerous.

Steve Montgomery
Steve Montgomery
Member
7 years ago

The typical reaction is to try to generate more dollar margins by growing sales. This only works if your competitors don’t follow suit. Historically that is just the opposite of what happens in the grocery industry.

I don’t foresee the industry changing its approach during the current deflationary cycle. The result will be lower profits for everyone until, and unless, some drop out of the race either because they reposition to have pricing be a smaller portion of the retail strategy or fail and go out of business.

David Livingston
7 years ago

My advice would be to stay the course. There are a lot of smaller grocers like Sprouts, Fresh Thyme, The Fresh Market, Earth Fare, Mrs. Greens and Natural Grocers which have been expanding rapidly by using debt. They will be be crushed because they are not that good and the pie is too small to share. Fairway in NYC has already gone bankrupt. Look for several more bankruptcies. Be patient, sit back and watch the market share come slowly back to your stores as the highly-leveraged wannabes start closing stores or selling out for pennies on the dollar to private equity groups. I expect Whole Foods and Kroger will be the winners. The mediocre small natural/organic stores will see losses and floundering chains like Marsh, Winn-Dixie, Bi-Lo, Food Lion, etc., will need to make some decisions on store closings.

Lyle Bunn (Ph.D. Hon)
Lyle Bunn (Ph.D. Hon)
7 years ago

A deflationary period offers the opportunity to sell alternatives based on the value proposition at a time when consumers are more open to considering their options. At the same time, the pruning of product lines and re-calibrating shelf allocation and promotional approaches can have a “Hawthorne Effect” on consumers, where their attention level can be increased on areas that benefit the retailer.

J. Peter Deeb
J. Peter Deeb
7 years ago

It is ALWAYS important for retailers to gain market share against their competition, however grocers must also be careful to stay true to their strategic plan during this period of deflation. Passing savings to consumers is critical but now is the time to become more efficient in operations and effective in marketing. They must make better use of data to make sure customers are targeted to keep them loyal, to enable more efficient labor scheduling and to insure efficiency in routing and deliveries to contribute to offsetting revenue lost due to deflation. A price war is a fast way to the bottom for all and could make it difficult to raise prices when commodities go up as they inevitably will do.

Shep Hyken
Active Member
7 years ago

The title of the article references a price war. Why is that news? Regardless of inflation or deflation, grocery stores typically compete against each other with pricing strategies that include “every day low prices,” “low price guarantees,” “guaranteed lowest prices” and price matching. Throw in some loss-leaders and why does anyone act surprised over shrinking margins and profits?

How do you work around this? First, consider a pricing strategy that isn’t about lowest price but competitively priced, offer stellar service and be known for something other than price. How does Whole Foods, who has the nickname of “Whole Paycheck,” seem to always be busy? They position themselves in a different way; fresher, higher quality, healthier, etc.

Study the leaders in the different categories: low-price, high-price, etc. There is a lot to learn from these different business models.

Roger Saunders
7 years ago

Kroger’s Rodney McMullen is correct. Price is only one element of a grocery shopper’s experience. Prosper Monthly Consumer Survey Insights point to 25 different “Reasons” that Consumers shop their favorite Grocer MOST often.

The macro reasons for deflationary pricing will be largely beyond grocers’ control, as Tom Ryan points out. Run to strengths, manage weaknesses.

Grocery Shopping is the most common experience that the typical consumer household has in their day-to-day retail experiences with some 90+ shopping trips per year. With repeat purchases, price will be a high priority in a consumer’s choice of a grocer —- it’s #2 among Kroger shoppers, as well as #2 among Safeway and Stater Brothers shoppers, #1 for Walmart and HEB shoppers, #3 for Wegmans and Ralphs shoppers, and #4 for Publix shoppers.

As grocers go up against competitors, they have to understand why their shoppers choose them MOST often. They also have to know why shoppers choose their competitors MOST often. Having that strategic knowledge better positions them to run to their strengths and manage their weaknesses.

Nine out of ten Walmart grocery shoppers say that price is vital to them, while 7 out of 10 register location, 6 out of 10 say selection, and 1 out of 3 consider quality as a reason to shop Walmart for groceries. The later may be perceived or real, but it is a reason that has to be addressed — i.e. weakness.

On the other hand, 8 out of 10 Kroger shoppers feel location is their top reason, 3 out of 4 mention price, 7 out of 10 say selection, and 6 out of 10 believe in Kroger quality.

Each of these have to be considered core reasons for grocers. Knowing how they may stack up with competitors has to be monitored in order to keep and grow share in a deflationary cycle. In addition, those grocers will want to monitor reasons that have been unique strengths. Kroger gets high marks on fresh produce, frequent chopper cards, fuel/gas offerings, and trustworthy retailer compared to their competitors. Frequent shopper card use has dropped in significance over the past 5 years, while the other reasons have grown in importance.

Walmart still holds positive reasons for 24/7 availability and one-stop shopping, but that advantage has declined among their shoppers over the past 5 years — protect it, and turn it up during the deflationary period.

Bill Hanifin
7 years ago

A focus on customer service would be a solid way to navigate the deflationary time predicted to be ahead. As an example from my local market, I have noticed that while Aldi has highly competitive prices on selected items compared to competitors, they often staff with only one cashier station open.

The result is longer wait times for checkout, meaning the consumer effectively must “pay” for the lower-priced product with another currency — time. Knowing that some customers shop Aldi only for price, some segments will not be impacted, but Aldi would be well advised to monitor customer feedback.

Great customer service can take the consumer eye slightly off the price and grocers fighting for market share can use this strategy to gain market share in every environment.

Richard Layman
Richard Layman
Member
7 years ago

A problem is that the word “deflation” is used too cavalierly to describe three or four different things that are going on:

1. If there is deflation, I don’t see it in my food basket (but I don’t buy a lot of meat). I do see price raises, for items like pasta, canned goods, etc., with of course some exceptions, and with the exception of promoted “every day low price” on various items (e.g., Barilla pasta sauce or Swanson’s broths or 49 cent/lb. bananas all at Giant-Landover).

2. As mentioned by others, competition from deep discounters like Aldi is affecting even the more successful retailers, and that is an issue irrespective of inflation. How to fight that? (One way is by private labeling. Aldi’s private label goods other than USP items aren’t all that great, although I’m fine buying standard identity items and produce from them.)

3. Competition from out of home food purchases is an ongoing issue. How to compete? Some by selling prepared foods, making it easier to buy prepared foods, meal kits, etc. Wegmans especially is big in this segment. No other traditional supermarket probably executes at their level. Since they aren’t present in most markets, there’s huge opportunity for other companies.

To buy and prepare food, you have to be able to cook, so making sure people know how to cook is an area where supermarkets can differentiate.

4. With Sprouts, etc., Mr. Livingston is right that they are expanding through debt and it is unsustainable. But they are reaching a segment not successfully captured by traditional supermarkets. Supermarkets are going to have to do a way better job at store type segmentation, like HEB’s Central Market or Giant-Eagle’s Market District, as well as the new small store concepts Main & Vine, bfresh, and 365 by Whole Foods.