NORTHFIELD, Ill. - With prices of many Center Store items on the rise, it's a good time for retailers to promote their private label as a less-costly alternative to national brands, analysts said.
Kraft Food here, Hershey and other manufacturers have announced that they would raise prices between 1% and 4% on products such as crackers, candy, dog treats, beverages and frozen pizza. Other manufacturers are likely to follow suit.
Retailers will likely pass on these price increases to the consumer, said Neil Stern, senior partner at McMillan Doolittle, a Chicago-based retail consulting firm. "I think Wal-Mart is the wild card," he said. "If they go with it, other retailers will." He said that the retail giant lately has been easing up on its low prices.
The price hikes will likely be fairly permanent since manufacturer prices have been relatively flat for some time, said Jon Hauptman, vice president at consulting firm Willard Bishop, Barrington, Ill. Center Store could be particularly hard hit because it's faced more pressure than other departments from nontraditional value formats.
Now is an especially good time for retailers to grow their value tiers, said Hauptman, who expects more retailers to start introducing a second tier to their private-label offerings. "It will attract shoppers looking for the absolute lowest price and will also differentiate [supermarkets] from other formats," he said.
Customers will become accustomed to these higher prices across the board, so retailers should increase their store-brand prices in proportion to the national-brand products, Hauptman said.
They shouldn't increase them so much that the products lose their competitive edge against the higher-priced national brands, though, and they should offer lower prices on known value items, observers said.
High fuel costs, which led to increased manufacturing, packaging and distribution costs, are blamed for the price increases. Hurricane Katrina drove the cost of fuel up even higher and destroyed or damaged both manufacturing plants and crops.
As a result, anything packaged in plastic, from orange juice to soft drinks and bleach, will probably increase in cost, analysts said.
Prices of soft drinks are likely to increase more slowly than other products' prices because consumers are used to rock-bottom prices on these beverages, making it harder for retailers to sustain increases, Hauptman said.
The impact of manufacturers' price increases on consumers is expected to be moderate, though. The Consumer Price Index will rise between 2.5% and 3.5% in 2006, predicted U.S. Department of Agriculture economist Ephraim Leibtag.
That's because consumer food prices have stabilized in recent years, thanks to better inventory management and cost-saving techniques; the year-round availability of many products; increased competition from alternate format stores; the growth of meals consumed outside the home; and increased demand for convenience, quality and low price from consumers, Leibtag said.
If 2006 inflation reaches the high end of the estimates, it will be slightly higher than levels in 2004 and 2001, according to The Food Institute. Inflation is expected to be more moderate than it was in the 1980s, when it hit 4.6%, and 1970s, when it reached 8.1%.
Pricing is more important now than it has been over the past 15 to 20 years because competition between retailers and between different formats has increased, making it a top issue for supermarkets, Hauptman said.
He expected them to respond with strategies that ensure all their prices follow a common set of guidelines.