Food Inflation Levels Off

JON SPRINGER

NEW YORK — Rapid food-cost inflation could subside shortly, but high energy prices will continue to challenge retailers and consumers, Steve Wieting, an economist for Citibank, said in a conference call last week.

Wieting noted that weekly commodity prices for items like wheat, beef, chicken, corn and soybeans are either at or below their peak levels, “pointing to a diminished pace of future inflation,” which he estimated to be around 5% for food overall this year.

In addition, Wieting said he is anticipating an “agriculture profit boom” over the next few years as supplies increase behind a surge in planted acreage.

“When you look at the leading indicators of food price inflation, you see stability to a modest giveback” in coming months, he said. “Beyond this fall, unless something goes very wrong with the food supply, we would be looking at a substantially weaker pace of consumer inflation. It won't be easy for consumers, who will still perceive food as a negative for them, but I don't think the hit will get any larger.”

Wieting added, however, that he did not see a corresponding trend in energy availability. Rising fuel costs, along with declines in employment and weak income growth, have put the U.S. in a downturn that he expects will be “mild, but prolonged.”

“It wasn't until the beginning of this year where we felt the cloth of confidence broken and the cost of capital rising for all borrowers, whether they are prime, subprime, investment grade or otherwise,” Wieting said. “Whether we apply the word ‘recession’ or not, it remains a very bad event in a cyclical downturn that we believe will be mild, but prolonged.”

Food retailers for the most part are adjusting well in this environment, added Deborah Weinswig, a food retailing analyst for Citibank, who also participated in the call. She noted that retailers for the most part have passed along their higher costs to consumers and as a result have gained better leverage on their fixed costs. They are losing some of that margin benefit on fuel sales, however.

“Last year, Safeway got into a little trouble saying they couldn't pass along inflation. That has definitely changed since then, and we haven't seen the same margin pressure since,” Weinswig said. “I think what's happened is that food retailers are passing along food inflation as they get it, and it is a benefit on the [selling, general and administrative expense] side.”

The economic environment is also causing a shift in buying patterns, Weinswig said, with some shoppers “trading down” from restaurants to supermarkets, and others from supermarkets to discounters. Some stores are seeing significant acceleration in the sale of private-label goods, while weekly ads are getting more aggressive.

“Things are also getting more competitive,” Weinswig said. “Items you don't normally see on the front pages of ads, you are seeing now — like milk, meat and produce, where you're seeing the greatest inflation rates.

“The other issue you are seeing among food retailers is that private-label growth is outpacing national-brand growth,” she continued. “Safeway said in its most recent call that private label was outpacing national-brand growth 6-to-1 in Center Store and 4-to-1 in the whole store. That's having a dampening effect on the top line, but it's helping margins.”

Wal-Mart, according to Weinswig, has been alone in resisting price increases and has seen a subsequent increase in store traffic — its first since August of 2005. She said improvements in the in-store experience, along with a more aggressive price message, have helped the Bentonville, Ark.-based retailer.

“They've been very aggressive in improving the in-store experience at a time when [rival] Target has been cutting their labor hours, so I think the consumer experience gap between them is narrowing,” she said. “They've been very aggressive with their value message, and focused on advertising on TV and online to drive this price message home, and it has really worked in their favor.

“Quite frankly, with gas prices where they are, we were concerned that they would be down this year,” as shoppers find they may spend more in fuel to get to a Wal-Mart than they can save from lower prices.

Wieting said he expects that government refund checks, rather than causing a boom in retail sales, will serve mainly to prevent a large falloff triggered by a heavier burden of gasoline prices.

“Without this one-time benefit of the tax rebates, chain-store sales would see a bigger deterioration, rather than the leveling out of sales that we are seeing,” he said.