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Higher food prices could hurt grocers and help restaurants

June 30, 2014

Drought, sick pigs and high demand are just a few of the reasons that food prices have been climbing in recent months and hitting consumers squarely in the wallet. According to the U.S. Department of Agriculture (USDA), the Consumer Price Index (CPI) for all food increased 0.4 percent from March to April and then 0.4 percent from April to May to stand at 2.5 percent above where it was in May of last year.

While food prices are going up across the board, the rate of increase is not uniform, according to USDA figures. Prices at grocery stores now stand at 2.7 percent above the May 2013 level while those charged by restaurants have risen 2.2 percent on a year-over-year comparison.

The shrinking of the gap between the prices charged in grocery stores and restaurants could prove a boost to foodservice operators, according to Bernstein analysts Alexia Howard and Sara Senatore.

According to a forecast by the analysts, via NBC News, prices for food-at-home will rise 3.5 percent in the second half of the year while restaurant prices will increase only 2.5 percent.

While one percent doesn't sound like much on the surface, the analysts pointed to other factors that go into the decision of whether to make a meal at home or go out, including prep and clean up time.

Discussion Questions:

How do you expect higher food inflation, should it persist, to affect the dining habits of Americans? How would you address the issue if you operated a grocery store? What if you operated a restaurant?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How will food inflation affect share of market for grocery stores and restaurants?

Comments:

Restaurant chefs are much better at adjusting ingredients than the average home cook. Protein price fluctuations are not new and most menus have plenty of room to maneuver. New flavor profiles from unusual ethnic sources can be very helpful. And portion sizes are still too large in many restaurants, so hopefully, this round of inflation may help shrink some plates. Prepared food manufacturers have a big challenge here. Downsizing frozen products, for example, is not usually received positively.

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Dan Raftery, President, Raftery Resource Network Inc.

Higher food prices will impact all food joints. So there is no reason to go out and spend more at Red Lobster and use overpriced gas in the car to get there.

Grocer's have dealt with this before and as food prices crank one thing a grocer could do is have pre-prepared dinners ready—for example; roast chickens with side dishes, ready to go. Promote the dinners—say, "It is chicken night," and send the shoppers home with what they need for a great dinner. It may be easier to control the number of these prepared dinners as the dinner week programs take off.

Our kids (in their late-20s/early-30s) have been buying these types of dinners as other foods they used to eat are going up in price. Grocers are creative—they can beat the restaurant menus.

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Tom Redd, Vice President, Strategic Communications, SAP Global Retail Business Unit

I don't see much of anything happening in regards to a major change in how people eat, as it is still about a 50 percent savings to eat at home vs. at a restaurant. A family with two-to-three kids can make a meal at home for less than $4 per-head, and eat well. Fresh pasta, a salad, rolls and a drink are significantly less to prepare at home, but time starved consumers will pay more for the convenience.

Cooking at home is become an event, as some people are really into preparing fresh meals they may have seen on the cooking channel, and like to challenge themselves to prepare something good for their friends or family.

The nice steakhouses are extremely expensive, whereas the Texas Roadhouses are more affordable, so the choice is up to the consumer to decide what they want to spend their money on, and I just don't see a huge shift either way right now.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

First off, this is the first time I've ever seen RetailWire cite an article from National Geographic in a discussion and I think that's great.

The adage in economics, if I remember it correctly, is that debtors benefit from inflation and creditors benefit from deflation. In this sense, it doesn't matter if you are running a restaurant or a supermarket. What matters is your financial position—if you have a lot of debt now and there is inflation, each dollar that you have to pay off in the future is worth less than the one you borrowed.

This may be tangential to the first question, but does apply, because shoppers/diners are in the same situation. If they act logically (and that's a big "if") customers with larger debt loads should feel more comfortable spending money on things like dining out, while creditors like pensioners will look for less expensive options.

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Ron Margulis, Managing Director, RAM Communications

The inflation rates for food will most likely even out for supermarkets and restaurants and have no noticeable affect in the long term. Inflation is always and everywhere and should be no surprise. Recently I was working with a larger discount retailer that has a similar pricing structure to Walmart. With cutbacks in food stamps, they noticed their sales went up along with Walmart. The reason why was the markets they are in are still dominated by high-priced sterile chain supermarkets, meaning low-income shoppers are now more concerned about price and need to find stores with lower prices. In markets already dominated by Walmart, the low income shopper has already switched and now Walmart and low price stores are feeling the pinch too. WinCo has also been on top of this, moving into markets like Dallas/Fort Worth where high-priced chains have the majority of market share, leaving some low hanging fruit for them to pick off.

David Livingston, Principal, DJL Research

Even in a high-tech world some vestigial truths continue to soldier on—in this case, the law of supply and demand.

So, let's look at the economics of this question. If wholesale food costs (producer to any outlet) are increasing, that will—sooner or later—mean that food service operators will have to either a.) raise their prices and/or b.) sit by and watch their margins erode.

In the short run, food service operations may appeal to price-driven consumers more than food at home but, in the long run, that would just fuel a continued rise in demand not, in this case, accompanied by a parallel rise in supply. The bottom line is; the bottom line will suffer.

I'm personally not sure if food service operators (as a a whole industry) have consistently gained share on the basis of price (although some individual operators clearly have). More to the point, American lifestyle and eating behaviors have changed, and that change has come at the expense of traditional supermarkets.

But, for a moment, let's take a look at the question, reserving the right to a caveat.

Grocery store operators could begin in-store and digital education programs highlighting good, basic food economics ("why the turnip is your friend," perhaps) which add a secondary benefit ("eat cheaper AND healthier").

Restaurants could do what—well—what restaurants do, keep stressing the benefits of quantity over quality ("Buy One Pizza Get Seven Free").

And now that caveat: food shortages are the results of radicalized weather patterns and nobody except maybe Fox News believes these were a one-season anomaly. Without opening the gates up to a whole "global warming/climate denier" debate, I think we can agree that most rational climate scientists believe we are in for a shift in climate patterns (again, irrespective of why) and the result will be weather patterns not-so-conducive to certain groups, whether that's drought, extended winter, forest fires, killer storms or whatever.

So, the advice to everyone selling food—regardless of how and where they sell it—is to start paying attention to the science of agriculture because it's bound to change the economics of food distribution. I live in Michigan, for example, where large parts of the commercial berry industry are writing off all of this year and hoping for better weather in 2015.

And it isn't just fruit that's in question. Grain supplies are dropping, which means livestock feed prices will increase, which means that somewhere down the line the price of the Giganto Burger will have to rise along with the price of ground beef in the supermarket.

Think about it. It's past time somebody does.

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Ryan Mathews, Founder, ceo, Black Monk Consulting

With more customers opting for healthier options, this is a great time for supermarkets to offer more varieties of pre-cooked/ready-to-cook fresh meals with sides and controlled portions. Promotions like "don't cook Wednesdays" could go a long way to drive store traffic. It is crucial that a healthier and tastier option is available vis-a-vis eating out.

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Shilpa Rao, Practice Head - Merchandising, Tata Consultancy Services

Inflation will cause people to reduce discretionary spending (including eating out). Last time prices went up significantly in 2007-2008, many food manufacturers benefited as people ate in-home more (even as their prices were rising).

'jmarseu'

Higher food prices will hurt grocers. Many restaurant meals are already similarly priced to grocery store ingredients. If I were to buy all of the ingredients for a chicken dinner, I would spend $21.37 at my local grocery store. I could pick up a similar dinner from KFC for $20.00.

According to Harris Interactive, three in 10 Americans love to cook. The other seven would anticipate having to spend 1 and 1/2 hours to prep, cook and clean up. Based on the average U.S. hourly wage of $24.32 this is an added cost of $36.48 for a total meal cost of $57.85. Would the home-made meal be tastier? That depends on the cook, but I bet a typical kid would prefer the KFC meal. Would it be healthier? In most cases yes; but for many people it isn't worth the equivalent of $37.85 more to cook at home.

As for buying prepared meals at the grocery store, I'm sure that many people do that on grocery day. The other six days of the week they may prefer a drive-through window to the typical 30-plus minute ($12.16 of time) grocery store experience of parking, walking all the way through the store to the deli, waiting in line there, and again at the register to pay.

'tmlens'

The American consumer is going to find a way to adjust intake and still hold up food calories and consumption. Ask any housewife or consistent shopper, the USDA's estimate that food prices have only escalated 2.7 percent over the past 12 months is about as accurate as the Department of Commerce having to alter first quarter growth three different times, before admitting that GDP actually declined by 2 percent.

As George Anderson points out, " ... the rate of increase is not uniform." The consumer spots that fact well ahead of the marketplace.

No need to limit the cost of food to the commodities themselves. Merchants in restaurants and grocers are both paying more for health insurance, energy and labor. Each of these items are pushing overall food costs up for consumers.

Trips are down at quick service restaurants on a year-over-year basis, based on the May Prosper Insights & Analytics Monthly Consumer Survey. The May 2014 survey shows that Adults 18-and-older visited QSRs on average 3.3 times per month, while May 2013 had 3.4 visits per months. Just six months ago, consumers were spending $12.08 per visit. By May 2014 that figure had dropped to $11.07.

Pizza Restaurant visits are down on a monthly basis from 1.7 (May 2013) to 1.6 (May 2014), while the spend for extra toppings have dropped from six months ago, as well from $16.88 per pie to $16.40 in May.

Don't forget that important "breakfast coffee." Starbucks, which has announced a recent price increase for a cup of coffee is mentioned by 13.0 percent of the May respondents to the Prosper survey. That is down from 14.5 percent who chose Starbucks in May 2013. The survey indicates that 0.8 percent of the swing went to McDonald's or Dunkin Donuts. Where did the rest go? To the ether. When the consumer is stressed, they make adjustments in their everyday behaviors. Best to keep an eye on a bigger picture look of the economy, as well as the consumer "share of stomach".

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Roger Saunders, Managing Director, Prosper Business Development

On the contrary, higher food inflation could turn out to be beneficial for grocers with more people avoiding eating out. And yes, add gas prices to your restaurant bill. Even if the difference goes down it will still be upward of 50%. This should be seen as an opportunity by the grocers to engage people in such a way so as to avoid eating out even more!

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AmolRatna Srivastav, Asst. General Manager, Analytics and Insights, Tata Consultancy Services

You have to separate the segments of restaurants in order to make a fair determination of the question. QSRs are a big draw as their prices for their value menus continue to challenge the wisdom of preparing meals at home. In a grocery store, merchandising should reflect and/or resurrect a sort of "home meal replacement" convenience via promotional displays. There has to be a compelling reason for the shopper to pass by the QSR during a busy work week.

For restaurants, there are enough tools to extract costs from ingredient expense to optimize the value menus even at full-service establishments. Highlighting value as some chains do is a great attraction for busy consumers.

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Ralph Jacobson, Global Consumer Products Industry Marketing Executive, IBM

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