The economy is strong, so why can't Canadian grocers raise prices?

Retail food prices are not moving much these days. They are barely higher than last year, with a modest increase of 0.5%. In fact, according to Statistics Canada, prices dropped over all by 0.7% over the winter months. South of the border, U.S. grocers are dealing with the same issue. Since our economy has some momentum, you would expect food retail prices to inch higher. But they are not moving, and for several reasons.

Grocers will always pick the right time to raise prices. Unemployment is near historic lows, consumer confidence is relatively high and inflation is inching upward – normally, these are perfect market conditions. Not so. For one thing, both Walmart and Amazon are at war trying to attract customer loyalty through online strategies. Walmart’s online food sales were disappointing in the last quarter, but sales are growing nonetheless. Generic brands are becoming increasingly popular as consumers trade down. Loyalty -- the most powerful tool a grocer needs to increase sales – is almost non-existent nowadays. The power has now firmly shifted into the hands of consumers, and grocers know it. With interesting tweaks to their strategy, profits are still there but market shares are not.

For the past few years, grocers have been cutting costs and passing the savings to consumers, while hoping the perfect inflationary environment would return so they could raise prices again. The return of food inflation was exactly what the grocery industry was hoping for, but so far, results have been disappointing. What they didn't expect was to lose the ability to increase retail prices. With higher general inflation, costs are increasing and grocers are now getting hit in more ways than one.

Grocers can try to justify their poor financial performance, citing higher minimum wages as one of the contributing factors, but top-line growth revenues are painfully idle for most of them. All grocers are moving aggressively on their online strategy and exploring home delivery. The number of stores in such markets as Toronto, Guelph, Ont., Halifax and Vancouver is growing. There are almost 24,000 food and beverage stores in Canada, which is up more than 5% from about two years ago. Bricks-and-mortar stores may remain, from the perspective of some executives, a sign of business success but this just isn’t true anymore.

Pressures are also coming from the online market, as more small-and medium-sized companies are chipping away at market shares in some food categories. It’s not just Amazon, but a portfolio of small companies using virtual platforms to brand and commercialize high-value products that cannot be found elsewhere. Innovation is always seen as a logical path to growth in the grocery business, but how we define innovation in food is also changing. Many innovative products are becoming known in Canada, but most are not sold by major grocers. They are sold online or through independent shops. This is another major problem that grocers in this country will need to quickly fix. If grocers’ capacity to increase revenues is hampered by more competition, the consequences of these pressures will be shared with food processors and others in the supply chain. To make it worse, relationships within the food value chain have not been great in recent years.

Despite the food retailing woes we are seeing in North America, food service is a different story. Prices have gone up by more than 4% since the beginning of the year, and the sector is not showing signs of slowing down. The convergence between retailing and service will be a definite attraction for a food-retailing sector desperate for growth. In a sector facing swift changes in consumer preferences, someone needs to realize the number of food stores we have in Canada is not sustainable. Don’t be surprised to hear more about food-store closures in months to come.