Fallout from the drought

As grocery prices rise, shoppers will need your help. This summer has been marked by excessive heat and scant rainfall in most of the country. The U.S. Department of Agriculture has designated about 1,500 counties in 33 states as drought disaster areas, and news reports on the plight of farmers and predictions of higher food prices have been plentiful. The fact that the public has already been primed to expect price increases at the supermarket may mean grocers will hear fewer complaints than when they raise prices for less dramatic reasons. In this case Mother Nature is the indicted culprit and reasonable consumers will likely conclude that their supermarket is also taking something of a beating. That may open up opportunities for good operators to engage with their customers, reinforcing their loyalty and creating good will for the present and the future. The primary competitive goal is to minimize sticker shock as much as possible. While people may be expecting higher prices, the economy’s continued poor performance means that millions of them are going to have trouble paying more for food. Those who read beyond the scary headlines will know that a sharp rise in commodity prices does not translate one-for-one at retail. For example, in a radio interview Agriculture Secretary Tom Vilsack noted that only 14 cents of every food dollar goes to the farmer, so the effect of commodity price increases is greatly diluted for the consumer. Unfortunately for grocers, he did not mention pressures on processors’ and distributors’ variable costs like energy and transportation. With the drought parching grazing fields and putting a serious dent in feed-grain harvests, livestock growers are expected to sell off many animals they would be keeping in a normal year. That should push down prices in the short term, until smaller herds raised on more expensive feed come to market. Why not let shoppers know it is a good idea to stock up on meat now by advising them of the anticipated price increases? It is a good way to tell them you are on their side. The extended economic slump has prompted many consumers to try private label products because of their lower price points. Many of them will be sticking with store brands as prices rise and it is reasonable to expect that other shoppers will at least give them a look. Private label stocks need to be well maintained. A hole in the shelf that forces the consumer into deciding whether to pay more for a national brand or forgo the item will send the message that you are not working with her in these difficult times. Retailers with high-quality private label programs have a good chance of converting many of their shoppers for the long haul. There may be some temptation to sacrifice a bit of margin in order to keep price increases modest, with an eye to recouping when the weather and the harvest return to normal. That is not an unusual gamble, but the risk may have gone up. Some climate scientists are projecting that what we now think of as severe drought may be the norm for the 21st century. If so, food inflation may become routine and make recovering lost margin extremely difficult. Mother Nature is not always a kind parent.