Last week, we took a look in this space at rising fuel prices and considered how prices, particularly those of gasoline, had the potential to snatch dollars from consumers' pockets that otherwise could be spent at retail.
Unfortunately, the news continued to be bad last week. The price of a barrel of oil topped the $40-mark, a level not seen for 13 years. Petroleum prices continued to react to jitters about the reliability of supply, a situation made worse by an attack in Iraq that reduced the amount of petroleum from there for a few days. That was the case even though the amount was no more than a tiny proportion of worldwide production.
This week, let's take our consideration of economic factors a little further. As you'll see by looking at the news feature referenced on Page 1, the price of oil is far from being the only factor at work in the economy. Indeed, numerous commodities that form the basis of fresh- and packaged-goods sectors are increasing in price. Several packaged-goods manufacturers have said that the prices of products are heading up because of price increases of commodities and fuel.
All this seems to portend a return to generalized price inflation and, more specifically, food-price inflation. There has been no real growth in food prices since 1996. One analyst cited in this week's news feature estimated that food-price inflation would amount to 1% to 3% this year. What would such an eventuality mean for food retailing, good results or bad?
Broadly, supermarkets have done well in times of modest price inflation. Part of the reason goes to consumer psychology. Absent inflation, most consumers won't tolerate price increases. They don't need to. Should one supermarket chain seek to increase price points, there will be many that don't. So consumers follow lower prices by switching shopping venues. Retailers learn there is no margin upside to increasing prices. Conversely, when there's a general perception that prices are increasing everywhere, increases at supermarkets are better tolerated, and become uniformly applied across the competitive spectrum. Indeed, there have been many times when price increases were tolerated so well by consumers that margin increases could be fairly easily obtained on the basis of rising prices alone.
Will that situation return? Some observers maintain that competition is so acute at the present time that price increases won't be tolerated by consumers no matter what happens to overall inflation. Perhaps the real answer is that there are opposing forces at work now. The tax-like effect of rising fuel prices argues against increased consumer spending at the supermarket, while the now-building food-price pressures argue that retailers must increase prices. If it develops that low-price players are able to exert stable or downward price pressures, the news for supermarket margins will turn grim.
One hopeful sign: Many observers are of the opinion that several months ago, Wal-Mart Stores became a little less resistant to vendor price increases in certain categories, such as apparel. There's now opinion that food-price increases are being tolerated, too. We'll see.