It looks like the other shoe has dropped, or, at least, is in motion. Or, to be more direct, the relentless increases in the price of fuel are finally starting to force an increase in the rate of inflation. The increase is unmistakable at the wholesale level, and undoubtedly will burst forth into consumer inflation.
Let's take a look at what's happening to inflation, then see what it might mean to the food distribution business. The Labor Department said last week that wholesale prices jumped 1.9% in September -- a huge jump that hasn't been matched in about 15 years, nor surpassed in more than 30. The largest component in the increase was fuel costs, but wholesale food prices also increased by 1.4% last month. That's because of an increase in egg prices of nearly 50% and of various vegetables, of 16%. At the consumer level, prices increased 1.2% last month. Core inflation levels were far more modest. Core inflation factors out the volatile energy and food components. Core wholesale inflation was 0.3% and core consumer inflation 0.1%.
How bad is this? In the past, broadly increasing levels of inflation have been greeted by food distributors as a mildly positive development. After all, if inflation is widespread -- and consumers recognize that -- it's possible to increase prices, top lines and profits even without tonnage increases.
Regrettably, it's not possible to take such solace now since this isn't broad inflation. Core inflation rates remain stable. That means spiking fuel costs are extracting disposable income from consumers' pockets, and depriving other sectors of the economy of those dollars. Moreover, the current situation robs the food distribution industry of pricing power, so margins are likely to be assailed and top lines stagnant. That portends fundamental changes in the way business is done. Changes will occur not just in the store, but in the way product gets to the store. Perhaps some of those changes are already emerging from the fog. Indeed, this week's issue of SN alone offers examples of both types of change.
We'll start with the logistical end. On Page 6, you'll see a news article about direct store delivery. As might be expected, some DSD vendors are increasingly reluctant to provide costly DSD services to retailers, especially far-flung retailers. Instead, DSD vendors are asking wholesalers to take products and deliver them to stores in the usual way -- consolidated with many other products. This phenomenon isn't entirely new, but it's evident that high fuel costs are accelerating this trend. Many retailers miss the attention that DSD drivers give their product lines in their stores, and don't greet this prospect with much enthusiasm. This may be an opening for third-party merchandisers.
Meanwhile, one type of retailer is especially put at risk by the dollar drain from customers' pockets: dollar stores. That format, and others, is analyzed in the group of news features referenced on Page 1. In many instances, sales are dropping at dollar stores because core consumers' discretionary spending power is being tapped by fuel costs. The possible bad news from the food retailing perspective is that operators of dollar stores are attempting to shore up bottom lines by adding a necessity: food.