JPMorgan analyst Charles Grom offers some insight into the world of grocery stores and food pricing:
Central Theme: Price increases across the board – with Kroger leading the way. In February, Kroger’s average price increased 2.9% over January levels (following a 1.2% decline from December to January), based on our 31-item like-kind basket. This month’s increase seems to be in-step with recent commentary from CEO David Dillon regarding a planned reversal of some accelerated price investment over time. Importantly, we note that February’s step-up in price narrows the gap between Kroger and the traditional grocers (SWY, Harris Teeter) by 160 bps – with Kroger now 10% lower, on average. Following Kroger, the retailer with the 2nd largest price increase this month was Wal-Mart, who raised prices 1.9% from January to February. All in, Wal-Mart still holds a very wide lead (15.6%) on the price front versus the grocers, albeit materially lower than when we started our study last year (January 2009 @ 21.1%).
- Take #1: Despite moderating deflation, produce prices still declining. Throughout this deflationary environment, produce categories have delivered strong tonnage growth as customers have ratcheted up purchase quantities in response to prices declines. As a result, in February, we believe that food retailers continued to follow an offensive pricing strategy for produce – potentially opting not to pass inflationary price increases forward to customers (recall wholesale prices Fruits & Melons, Fresh/Dry Vegs & Nuts rose 13.9% per January’s PPI release) in hopes to drive traffic into the store. Based on our proprietary store work, we found that out of 35 produce items across 5 stores (7 identical SKUs per store), only 1 item increased in price, 13 items were priced in-line with January levels, and 21 items experienced price declines.
- Take #2: Protein and dairy pricing remains mixed. While produce prices were directionally in-line across the 5 stores we visited (generally flat to declining), other perishable categories didn’t demonstrate similar cohesive trends. For example, we observed a number different of pricing strategies in protein (meat, poultry, eggs) and dairy products that seemed to vary by retailer. To explain, among the 20 total dairy items we checked (4 categories, 5 stores), prices increased on 4 items and decreased on 3 items from January to February (recall wholesale dairy product prices +5.1% year-over-year in January). Moreover, out of the 25 protein items we looked at, we observed 9 price hikes and 6 decreases month-over-month (YOY meat, poultry, & fish prices up 0.9% in January).
- Take #3: centre of store – showing some inflation? All-in, based on our 31 item like-kind basket, we believe overall higher prices in February (vs. January) are generally being driven by price increases on staple-like items in the centre of the store. At this juncture, however, it is still difficult to decipher if this centre-store increase is being driven by (1) inflation, (2) fewer promotional dollars from vendors, or (3) proactive price hikes by retailers. Nevertheless, prices are on the rise at the centre of the store, which could provide a bump to grocery sales over the coming months.
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