The two biggest factors impacting food prices

Wholesalers and retailers can expect food prices to drop within the next six months, predicts food analyst Kevin Grier.

In a recent report, Grier argues the two main factors that drive food inflation in Canada are commodity pricing and competition.

Despite the shakiness of the Canadian dollar, Grier says crop-based prices have dropped one per cent in the first quarter of 2016 and animal-product raw prices declined five per cent in the same quarter.

This should come as welcome news to retailers and wholesalers, as Loblaw recently demanded that distributors decrease their prices by a little more than one per cent to try and keep retail prices down.

Grier also points to the amount of square footage devoted to retail grocery in Canada as a key factor for pricing. He says increase in footage would indicate greater competition, which in turn, would probably spur a decline in prices.

However, looking at data from CIBC Institutional Equity Research, he says growth of retail space has stayed steady at about 1.7 per cent annually for the last 10 years.

This is in part due to an increase in grocery footage at Walmart and Costco, but also influenced by Target’s exit from Canada, as well as store closures reported by Sobeys and Loblaw.

Prices will benefit from what Grier says is intense competition between general merchandisers which are taking an increasing share of the almost $90 billion Canadian grocery market.

In 2004, grocery sales in supermarkets were nine times that of general merchandisers like Walmart’s and Costco. In 2015 in was down to four times, forcing supermarkets to keep prices competitive.

Grier says Loblaw and Sobeys have seen their market shares “trimmed” while Metro has held its own, with the biggest gains going to Costco.

He takes this to mean that competition for consumers grocery dollar is not abating and price will therefore have to adjust accordingly.

Grier says beef production is up between four and five per cent and he expects beef prices will begin to descend while pork will hold steady.