Prices of supermarket products declined by 1.3% last year in the U.S., the first annual decline in these products since 1967. This has obvious benefits for customers, but it can greatly hinder the profitability of businesses in the food industry.
Increasingly lowering the cost to the consumer has had a snowball effect, so that almost every major retailer selling grocery products has had to follow suit. Wegmans regional supermarket executives, for instance, claim that they have had no choice but to lower costs to remain competitive in the fight for new shoppers.
In the article below, we explain the ins and outs of this price war, how it may affect businesses in the food industry, and offer some tips for working around it.
The Ins and Outs
Supermarkets across the country are destroying their profit margins by continually reducing the sales price of their products. With strong competition proliferating in the form of online sellers and heavy discounters like Walmart and Target, smaller chains are being forced to lower prices to retain and attract customers. For example, Costco has cut its sales prices almost in half for some products, CFO Richard Galanti blaming price deflation. Last year, for instance, 18 extra large eggs were $3.61, and that has come down to $1.79 this year. A similar trend can be observed for many other Costco items, including bulk lots of pistachio nuts and dishwashing detergent. Meat, chicken and eggs have seen the greatest reduction in sales prices across the board, mainly due to an oversupply and a lack of demand for exports. As Wegmans executives contend, "Everybody who sells food is our biggest competitor." For those in the business of selling food, especially grocery items, they can expect to face some great financial struggles in order to remain competitive. The effect of this is compounded by the fact that, as supermarket analyst Phil Lempert notes, “labour and other costs are also rising, leading to a thinning of profits.”Impact and Considerations on Inventory Control
The impact of this price war is such that most U.S. grocery retailers will be struggling to keep up financially with the large discounts able to be offered by big companies like Walmart. As Jon Stringer, retail editor at Supermarket News suggests, retailers will need to try and sell higher volumes to maintain revenue. "To do that, they're putting things on sale and getting people into the store and hopefully selling them more quantity," Stringer suggests. This can be a successful method; however, it puts a lot of pressure on inventory and managers will need to remain vigilant when it comes to inventory control. Offering reduced prices for buying in bulk or buying multiple items at once may help grocery chains to bring in customers, but it can be difficult to pull off. If inventory control processes are not carefully looked after, this method could result in a lack of inventory and therefore, a loss in sales. The other obvious negative about offering large discounts is the reduction in profit. This method may attract new customers, but it may also mean compromising on your profitability. Managers need full oversight of inventory control processes, and ought to be proactive in predicting sales trends and inventory needs.