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2011: more of the same?

If 2010 was a challenging year for the grocery industry, 2011 isn’t shaping up much better.

Consumers are still counting pennies and the economic news continues to be mixed. At the same time, shoppers are demanding more from retailers: more convenient food, more healthy food, all at the price point they’ve come to expect–or less. Here’s a quick primer on some of the big issues for the coming year.

Deflation and the dollar

Prices for food at retail have increased 1% in the last year, according to Statistics Canada. Yet the three major publicly traded grocery chains all recently cited food-price deflation as a reason they didn’t attain better results. They also don’t anticipate that prices will rise soon.

So who’s right? Both sides, in a sense. The basket of goods Loblaw, Sobeys and Metro use to measure price changes is a bit different than the one Statistics Canada uses. But breaking down Statistics Canada’s numbers shows an unsettling trend. Fresh fruit and vegetable prices are down 5% and 4%, respectively, while actually costing 2% more for retailers to buy. That squeezes margins on products that consumers are increasingly interested in buying.

But those numbers aren’t likely a long-term trend. Margins on fruit and vegetables in 2009 were actually quite healthy, according to the George Morris Centre, an industry research firm in Guelph, Ont. Most economists state there isn’t much chance of deflation for the next year. Indeed, with most developed countries printing money to stave off domestic economic collapse, it’s inflation, not deflation, that’s the bigger worry.

World wheat prices, for example, rose 56% between June and August 2010, according to the World Bank. That was due to poor weather and Russia’s announcement of an export ban. Other commodity prices are also rising. That’s causing food manufacturers to raise their prices. General Mills announced “low single digit” percentage increases in October on some of its cereals and higher increases on some baking products such as flour and mixes. Kraft Foods is also reportedly raising prices on some products. Those increases will likely be passed on to consumers.

But even if deflation continues on some products–which would be more likely because of competition than actual food prices–grocers will be able to handle it. “Never underestimate the ability of grocers to strategize when it comes to pricing,” says Sylvain Charlebois, a professor specializing in food distribution and policies and associate dean of research and graduate studies at the University of Guelph.

Save a penny

Trimming costs will be one way grocers deal with rising food costs. “It’s sometimes easier to save a penny in getting the product to shelf than it is to increase sales by double digits,” says CCGD president, Nick Jennery.

But if commodity prices continue to increase, Canadian grocers will be hit twice because the dollar isn’t expected to keep rising to help cover soaring import costs. The loonie was flirting with parity with the U.S. dollar in November, and that’s where it will stay for the next year or two, according to the latest research by major bankssuch as CIBC, RBC and BMO.

“When [the Canadian dollar] appreciated over the past few years, produce costs–which are mostly imported–declined, adding to grocer margins,” says Kevin Grier, senior market analyst at the George Morris Centre. “Now that the exchange rate seems to have stabilized, the year-over-year gains will no longer be there.”

Competition, more or less

Grocers can specialize in different products, branch out into new offerings and cut costs, but all it takes is one competitor to start pricing aggressively and everyone suffers. It’s a fear all grocers have, especially since consumers are so cost-sensitive these days.

There are differing takes on how competitive the industry already is. Grier believes competition has been muted for the past year or so, allowing profits to remain healthy. Grocery peace may not last, though. “If someone wants to gain share, they could all see margins trimmed,” he says.

But John Scott, president of the Canadian Federation of Independent Grocers (CFIG), says the market is “extremely competitive.” He hopes the industry will get back to focusing on value rather than prices. “I would characterize the last year as a soft year in grocery retail, but what we’re looking for is a return to retailers finding and capitalizing on opportunities in the marketplace.”
Consumers, he adds, no longer go grocery shopping. Instead, they shop for what they think a retailer is particularly good at offering. That may mean meats and bakery at Costco, paper products at Walmart or fresh produce at Longo’s. Such pickiness is shrinking average basket sizes. But it also gives grocers a chance to clearly differentiate themselves, whether in a particular category or by latching onto a lifestyle trend where consumers will compromise on their pricing demands. “If you can mean something more significant than just a depot for packaged goods or paper products to the consumer, the consumer will embrace you,” says Scott.

But the market is competitive enough that everybody jumps on the latest trends. Most grocers offer prepared meals, healthier food and fresh produce, although the Canadian industry’s efforts are embryonic in some of those areas compared to some of the offerings available at European grocers. “It can be a clear differentiator because you have to do these things extremely well,” says Scott.

Demographics: Young at heart

The baby-boomer generation is getting older, and just as many of them were characterized as granola munchers in the 1960s and 1970s; they’re still interested in eating better to help live longer.

As it turns out, the government is interested too, if only by necessity. Roughly half of provincial spending today is on health care and that percentage is expected to rise as the huge cohort of boomers moves into their senior years. And a healthier Woodstock generation will mean lower health-care costs for government.

Label me, dude!

Sure, baby boomers are worried about eating right, but their children, the so-called gen Yers, are also paying more attention to what’s going into their bodies. “They’re eating pizza and lots of crap, but they’re also reading labels,” says CFIG president John Scott.

Still, there isn’t much in the way of a national plan governing healthier eating and combating diseases by limiting such nasties as excess cholesterol, sugar and fat. Canada’s Sodium Working Group has certainly brought attention to the danger of excess sodium in our diets, but its recommendations are not binding, which is probably how the food manufacturing industry likes it.

There is a tendency for governments and consumers to react in a knee-jerk fashion to health scares, says Nick Jennery, president of the Canadian Council of Grocery Distributors (CCGD). For example, when the British Columbia government report on obesity came out in 2006, some suggested government should start banning certain products, or at least introduce labels that tag products as “good” or “bad” food. (As an aside, that kind of labelling already exists in the U.K. for sodium content.)

Mmm…salt

In the U.K., average daily salt intake per person has fallen 10% in the last decade–from 9.5 grams to 8.6 grams, thanks in part to a campaign to get people to eat less salt. Canadians eat about 9 grams daily.

“Should we ban chocolate chip cookies? Maybe yes, maybe no,” says Jennery. “But if you look at countries around the world that have reduced their obesity problem or sodium intake problem, you will find a very co-ordinated program that brought everybody around the same table, all working in a common direction.” Jennery does not think the industry should start dictating what consumers can and cannot eat. The consumer will decide, and industry will follow, he says.

About the environment

Even though many consumers these days are more concerned about actually saving some of their own green, they still expect grocery retailers and distributors to be good corporate citizens, says Jennery. Green concerns are apparently not going away, and when the economy does rebound, they will likely get back on the environmental high horse. That means government will get even more involved in cutting back the waste.

“Our industry agenda is, quite simply: how do you stay ahead of the regulatory curve?” says Jennery. “An industry-led solution is far more cost effective and efficient than any political intervention.”

The industry has already taken some steps. The CCGD is in the third year of determining the industry’s carbon footprint by store or distribution centre by kilometres driven and even by square foot of operating space. It has also partnered with a global organization that has developed standards and measurements around sustainable packaging that will allow the industry to start evaluating the products it carries.

Of course, such efforts are not purely altruistic. As Jennery notes, garbage and recycling costs add up to hundreds of millions of dollars. But much of these environmental changes will be invisible to consumers.

The main thing consumers have probably noticed so far is the industry’s push to eliminate plastic shopping bags in favour of storebranded cotton or durable plastic ones that can be reused dozens, if not hundreds, of times. That practice certainly cuts down on plastic bags being sent to the landfill.

Food safety

If the industry’s main job is supplying food to people, its main obligation is ensuring that food is safe to eat. A recent study by the Canadian Grocery HR Council (CGHRC) found its industry partners, particularly the independents, have concerns about the lack of overall food safety training. Some of the problem areas identified included basic issues such as bare hand contact with food, failure to properly wash hands and inadequate cleaning and preparation of equipment and utensils, says CGHRC spokesperson Michael Sloan.

That’s why the CGHRC introduced the Frontline Online Learning program in October. The program combines existing industry manuals in an interactive format that provides the basics of food safety. Topics include personal hygiene, food temperature, refreshers on contamination, food preparation and storage, and food display procedures. They’re taught in seven 15- to 30-minute modules.

Bag-itis?

University of Arizona researchers recently found that reusable grocery bags can serve as breeding grounds for dangerous foodborne bacteria. Plus, some bags made in China contain lead.

The industry deserves credit for many of the initiatives it’s taken, including having one of the best food recall systems in the world, but more always needs to be done. As Jennery notes: “Food safety is so critical because we are in a consumer trust business. The first time you take your eyeball off that could be the last day of your operation.”

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