‘Turkey Wars’ Could Be Costly for Retailers

JON SPRINGER

NEW YORK — Retailers waging “turkey wars” this holiday season could be hurt by the rising cost of ammunition, but their efforts may pay off.

Turkey costs are up about 24% this year compared with last year, even though price competition among retailers for turkeys is hotter than it was a year ago, said Meredith Adler, an analyst at Barclays Capital, speaking at Barclays' annual Holiday Retail Roundtable here last week.

“Turkey prices are ridiculous, and since the cost of turkeys is up almost 25% this year, we know there are retailers selling below cost,” Adler said.

Retailers have traditionally used cheap turkeys as a loss leader to generate sales of complementary Thanksgiving items, and used the holiday season as a showcase for their fresh products. Sharp turkey pricing, along with well-stocked and well-trafficked produce departments, indicate traditional supermarkets are “all-in” for the season, observers said last week.

“I can't remember when we'd seen produce sections more busy,” Jim Hertel, managing partner with Willard Bishop, Barrington, Ill., told SN. “I think the fresh end is going to do well, according to the anecdotal things we've seen. For most [conventional supermarkets] produce has been star performer for them all year long, and we're looking for a strong performance through the end of the year.”

Barclays' examination of advertised turkey prices in various markets revealed that Southern California and Dallas — where food retailers advertised turkeys for as low as 29 cents per pound — were particularly hot markets. Wal-Mart, which was aggressive with its turkey pricing a year ago only to encounter in-stock issues in some markets, by contrast has taken a less aggressive posture with regard to turkey pricing, Adler added. Wal-Mart in some markets has said it would match competitor prices, Adler said, but otherwise has left turkeys off its weekly circulars.

This indicates that supermarkets themselves are at the source of much of their pricing pressure, she said.

“There is a misconception that Wal-Mart creates price competition. The reality is that conventionals can be very competitive with each other,” Adler said. “It only takes one spoiler in any market, and there are several markets with an independent retailer who is very strong in price, such as ShopRite in the New York metro area. And it makes it extremely difficult.”

Non-traditional competitors including supercenters, dollar stores and other formats were leading their Thanksgiving efforts with sharp pricing on complementary items, observers said.

“Almost everywhere you go across supercenters and discounters you're seeing really aggressive merchandising of the canned goods,” said Hertel. “Where things start to diverge is when you look at some of the breadth and variety offerings. Retailers who consider themselves to be experts in fresh are coming out with white asparagus, green asparagus, purple asparagus at very hot pricing. We're not seeing that at Wal-Mart. We're seeing more core basic items that people are looking for absolute price points on — the kinds of items that a consumer sees when they walk into the produce aisle at Wal-Mart - 99 cents, 89 cents, 68 cents.”

Tight competition between conventional supermarkets would likely also be a factor in how freely retailers can pass along price increases as inflation resumes, Adler said. She said higher prices for consumer packaged goods would likely come with higher promotional budgets for those items — a combination likely to benefit high-volume retailers the most.

“We're seeing difficulty among food retailers passing along higher costs, and it is still an open question about what will happen when we get to inflation among packaged goods,” Adler said. “It isn't clear that manufacturers will able to do that without some kind of increase in promotional monies.

“It is fair to say an increase in the list price could impact every retailer, but an increase in promotional money will help the best retailers.”

Food retailers typically express a willingness to pass along price increases, she added, but their ability to do so is easily shaken by a competitive threat.

“I would say there is a disconnect between [a retailer's] rhetoric and reality, and what they believe in their hearts,” Adler said, recalling recent remarks by Kroger executives indicating a willingness to pass on higher prices.

“ I thought about that and came to the conclusion that was something of a cross between an intention, and a message to competitors, and a hope — because the truth is, their ability to pass along costs is going to be determined by the competitive market.”

Barclay analysts said the holiday season could be a relatively strong one overall, led by renewed strength in luxury goods, continued growth in Internet spending and retailers entering the season with optimal inventory. Bob Drbul, a Barclays' analyst following Wal-Mart, forecast a 0.5% fourth-quarter comparable-store sales increase for the Bentonville, Ark.-based mass merchant.