Retailers, Suppliers Grapple Over Pricing

ELLIOT ZWIEBACH

Food retailers and manufacturers are likely to spend the next few months dancing around each other to see whether prices will go up or down, according to industry observers.

It's not a new dance, but the weakened economy and the heightened desire by retailers to offer more attractive prices to money-stressed consumers makes resolution of the issue more vital.

Steve Burd, chairman, president and chief executive officer of Pleasanton, Calif.-based Safeway, said vendors are resisting retailer pleas to lower list prices.

“There have been pretty public discussions going on among retailers and the vendor community, which has not backed off on prices despite drops in energy costs and declines in commodity costs,” he said earlier this month at the chain's investor conference — “and some vendors are suggesting there will be cost increases again in 2009.”

But with many shoppers switching to corporate-label products, Burd said, “I believe vendors will be so disappointed by the market-share losses [they experience] that they will have to absorb any increases. Market inflation in 2009 will be nothing like it was this year, and there may be deflation in some commodity prices.

“As they lose market share, vendors may give more allowance dollars, which is a reduction for them, but I don't think they're all that eager to lower their list prices.”

Rodney McMullen, vice chairman of Cincinnati-based Kroger, said being a manufacturer of corporate brands gives his company leverage when a supplier approaches it about a cost increase — “an advantage that has become even more important in an inflationary economy,” he said during the chain's third-quarter financial conference call last week.

“While prices of some commodities have leveled off or dropped, we continue to receive cost increases from several of our product suppliers. We are discussing pricing issues with many of our vendors to make sure the price they charge Kroger reflects the appropriate input costs.

“Kroger's manufacturing business and corporate-brands portfolio gives us additional leverage in these discussions,” he said.

That knowledge of corporate-brand costs and the declines that are occurring prompted Wegmans Food Markets, Rochester, N.Y., to make the move in November to lower some prices in anticipation of future vendor reductions.

Most of the reductions came on Wegmans-branded items, “[where] we have better access to detailed information on the factors that determine costs for those items,” Mary Ellen Burris, the chain's senior vice president of consumer affairs, said in a published column.

She also pointed out that suppliers locked themselves into contracts earlier in the year at existing cost levels in anticipation of further price hikes on commodities such as wheat, corn and soybeans, making immediate cost reductions unlikely.

Dick King, vice president, Associated Food Stores, Salt Lake City, said he sees valid arguments on both sides of the vendor-retailer pricing issue.

“As a wholesaler, we expect manufacturers to give us the lowest price based on their contracts, but as a private-label manufacturer, we know where commodity prices are, and if we don't see those declines reflected in the national-brand price, then we talk with the suppliers.

“But they're stuck trying to absorb some of the losses they incurred early on, and we understand that, because on commodities like sugar and flour, the cost can go up 1 cent or 2 cents per hundredweight and we don't raise the retail price to our customers — we absorb and accumulate those small increases till we can take a reasonable increase in price at the tail end of the process.”

A spokeswoman for ConAgra Foods, Omaha, Neb., told SN there isn't a one-to-one ratio that determines product pricing, because of many input costs.

“While the costs of certain inputs have come down in recent weeks, the costs of commodities are still higher than they were a year ago, and that influences the price of our products,” the spokeswoman said. “So we are constantly re-examining all the factors that influence the product price, and we routinely implement cost-saving measures in production that help offset, to a degree, the higher commodity costs.”

The spokeswoman for another supplier company, who asked for anonymity, told SN that some commodity costs have come down, “but some are higher than they were a couple of years ago, so manufacturers are still facing a lot of cost pressures.”

Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., said many retailers believe rising supplier costs that resulted in higher prices at the consumer level have hurt retail sales, “and a lot of retailers want suppliers to lower their pricing to get volume going again.”

“They want to see price rollbacks from manufacturers, particularly as they see commodity and energy costs nose-diving,” he said. “But the manufacturers are saying that they are still dealing with increased ingredient costs, and while they're willing to make more promotional dollars available to retailers, they're not willing to lower their list prices.

“Meanwhile, retailers want to lower shelf prices, but they can't if product costs continue to be up 7%. So retailers are continuing to lose volume, and they don't see getting more promotional dollars to run hotter ad prices as a solution.”

Gary Giblen, executive vice president of Goldsmith & Harris, New York, said a switch by suppliers to more consistent list pricing would help retailers reduce their LIFO charges, which reflect inventory investments. Kroger raised its LIFO estimate last week for the fourth quarter.

“Better list prices, rather than promotional prices, would enable more high-low retailers to switch to everyday pricing to appeal to today's more price-sensitive consumers, who are pretty aware of what prices are and buy only when items are on sale,” Giblen pointed out.

“This has been a yin-and-yang issue for many years, and although careful shoppers can probably do better with deals, the fact is there's a lot more price sensitivity today, and retailers just can't afford the perception that any of their prices are out of line.”