FOOD PRICES DROPPING, OPERATORS ADJUSTING

JOANNA RAMEY

WASHINGTON (FNS) -- Supermarket food prices are taking somewhat of a tumble in many categories -- never good news for retailers struggling to keep profit margins strong. But analysts say that in the scheme of overall business, the decline doesn't ring a warning bell about retailers' bottom lines, partly because stores are adjusting to the changes.

The drop in food prices, while not dramatic -- dipping in recent months a half of a percentage point in many sectors -- is nonetheless expected by analysts to continue in the near future, while easing toward year's end. The only notable exceptions are coffee, sodas and other nonalcoholic beverages, for which recent monthly price gains of an average of half a percentage point have been widely influenced by the increase in the cost of coffee.

"Weakness in grocery store prices is surprisingly widespread," reports Don Ratajczak, director of the Georgia State University Economic Forecasting Center, in his latest analysis of trends in retail prices.

Ratajczak forecasts grocery prices to end the year 3.5% above December 1996. By comparison, grocery store prices ended 1996 at 4.9% over year-ago levels, the largest year-over-year increase since a 5.8% increase in 1990.

Annette Clauson, an economist with the Department of Agriculture, said she expects grocery store prices, as tracked by the Labor Department's Consumer Price Index, to continue dropping in small increments through May or June, then leveling off for the rest of the year. Much of the decline has been seen in the meat and dairy counters as a result of increased supply of cattle and swine. Poultry prices have also been weak, largely to compete with lower beef and pork prices, said Clauson, who forecasts grocery prices to end the year 2.5 to 3.5 percent above last year's levels.

"Any deflation is bad because it makes it harder to cover the fixed costs," said Debra Levin, a supermarket analyst for Morgan Stanley. "If volume increases sufficiently to cover the downward price pressure, then that's fine. But it's a very tough and competitive environment."

Fortunately, Levin said, the drag on profits from lower prices is offset by the fact that overall inflation continues to be benign, which translates into stable overhead costs for stores, particularly for labor and energy.

Bob Lupo, an analyst with B.A. Securities, said grocers are well-prepared for factoring lower prices into their business plan, since consumers -- and competition -- have required retailers to favor a promotional pricing strategy. As a result, stores have learned how to make up the difference in sales by taking costs out of their businesses' operations.

"Increased operating efficiencies have lowered costs from a decade ago, and stores have improved margins by enhancing private-label offerings," Lupo said.

Kurt Funderberg, an analyst with Ferris Baker Watts, added supermarkets' use of category management as another cost-saving strategy to offset price declines. "The companies I've talked with haven't seen any degradation in their margins, because of their ability to cut costs and operate efficiently," he said.