SUPERMARKETS FACED LOW FOOD INFLATION IN '97

JOANNA RAMEY

WASHINGTON (FNS) -- The supermarket industry witnessed extremely low food inflation for 1997, with prices up just 1% over 1996 levels.

The low inflation in the industry reflected intense competition, an abundant supply of food and the economy's overall low-inflationary picture, financial analysts told SN.

The slight uptick in supermarket prices stands in contrast to 1996 when prices rose 4.9% over 1995 levels. That increase outpaced the 3.3% increase posted for all retail goods.

The modest 12-month increase in food prices for 1997 was below the already low overall inflation rate of 1.7%, as measured by the Consumer Price Index.

On an annualized basis, which is a different way of looking at the figures, supermarket food prices last year increased 2.5%, well below the 1996 surge of 3.7%.

Food accounts for roughly 70% of supermarket sales.

Bob Lupo, a high-yield analyst for BancAmerica Robertson Stephens, Chicago, said retailers' inability to increase food prices further during 1997 stripped companies of a sales "cushion." Consequently, the importance of improving margins by being more efficient and by acquiring other chains increased, he said.

"The lack of inflation is another threat to business, on top of competition from restaurants, the Boston Markets of the world and supercenters, which makes it even more compelling to expand your business or watch yourself shrink," Lupo said, citing such mergers as Food Lion and Kash n' Karry, Quality Food Centers and Ralphs, and Stop & Shop and Ahold.

Annette Clauson, a food economist with the U.S. Department of Agriculture, said it's hard to measure the extent that competition for Americans' food budget is placing downward pressure on prices.

As far as restaurants, Clauson said the new generation of dinner-to-go carryouts and traditional eateries last year grabbed more consumer dollars. For the first 11 months of the year, Americans spent 3.7% more in restaurants and 2.5% more in supermarkets. In 1996, restaurant expenditures increased 2.8% as consumers spent 4.4% more in supermarkets.

Another factor putting downward pressure on supermarket prices is the global oversupply of food, particularly with fresh fruits and vegetables, Clauson said. At the wholesale level last year, food prices declined 1%.