Faced with the “Wal-Mart effect,” Canada’s grocery retailers can’t depend on price hikes to cope with rising food prices, according to a new report from the George Morris Centre.
The Guelph-based ag think tank on Tuesday released a new report on sales and pricing challenges in the Canadian food and beverage sector. It noted that while total food and beverage sales were up five per cent in 2007 over 2006, sales through grocery and specialty grocery stores were up just four per cent.
Meanwhile, drugstores and “general merchandise” stores such as Wal-Mart or Zellers saw their food and beverage sales rise seven and 10.5 per cent, respectively.
Grocery stores’ loss of market share between 2006 and 2007, while small at just one per cent, is greater than in 2004-05 and amounts to nearly $900 million in lost sales, GMC analyst Kevin Grier wrote.
That erosion of market share will continue, and protecting its share against Wal-Mart will be the focus of grocers’ attention for the next several years, he said.
Price, he said, will be the weapon of choice against the “Wal-Mart effect,” which he predicted “will dominate Canadian grocery for at least another year.”
“The Wal-Mart Supercentres are having a pricing impact in Canada far beyond what their very modest store numbers would indicate,” Grier wrote. (Wal-Mart’s Canadian web site lists just 31 Supercentres in Canada, all in Alberta, Ontario and B.C.)
Canadian retail food prices have been rising steadily since October 2007, Grier wrote, driven mainly by bakery, dairy and vegetables. Bread is up nine per cent from October to February, pasta 16 per cent and fresh vegetables 16 per cent.
However, he wrote, looking at the broader consumer price index, “it is not clear that there is a food pricing problem.” Volatility isn’t unusual in fresh fruit and vegetable pricing, and dairy prices, protected in Canada by supply management, are “characterized by a slow, steady increase.”
Driving food pricing increases, “or at least the concern about food pricing increases,” Grier wrote, is increased grain costs, which he said are due to U.S. ethanol subsidies driving up the price of grain corn, in turn driving up the prices of other food and feed grains such as wheat and soybeans.
“While the efficacy and merit of subsidized ethanol is almost non-existent,” he wrote, “there is no doubt about its buoyant impact on grain pricing.”
Eventually, Grier wrote, grain prices will drive meat prices higher, but it could take up to a year for that impact to be felt at the meat case. The process could take just as long in the bakery sector and for other grain-based products due to manufacturing, inventory and other logistics.
By comparing and re-indexing Canadian and U.S. consumer price indexes, Grier found U.S. food prices have risen six per cent in the 14 months leading up to February 2008, while Canadian prices rose less than two per cent.
But Grier also expects Canada’s consumer pricing to rise; he cites a Scotia Capital report that finds the rising loonie has somewhat sheltered cost inflation in Canada, as seen in the drop in produce prices. “However, as we approach the anniversary of U.S. dollar parity in the fall, this benefit will begin to erode,” Grier quoted Scotia Capital as predicting.
“The wild card in this, however, remains the exceptional competitive environment in the Canadian grocery sector,” Grier wrote, again citing Scotia Capital’s observation that Loblaw is committed to aggressive price cutting in its conventional stores.
It’s thus unlikely, Scotia Capital wrote, that Metro, Sobeys or any other grocer could hope to fully pass on higher costs to consumers, “and we believe food inflation will be negative for the grocers.”