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Grocery chains’ rising margins won’t last: GMC

Supermarkets in Canada appear to have taken price hikes to “bold new levels” during the third quarter of 2008, but they shouldn’t expect wider margins to last, according to the George Morris Centre.

A “think-piece” released Thursday by senior market analyst Kevin Grier points to a seven per cent increase in Statistics Canada’s consumer price index (CPI) for food purchased from stores in September this year over September 2007.

That’s the biggest such hike in at least 10 years, Grier wrote, and compares to three per cent for non-food retail items as well as for food bought at restaurants.

However, Grier wrote, that larger hike (compared to the 10-year (1998-2007) average of two per cent) is due mostly to the fact that pricing at stores was actually dropping at this time in 2007 due to a substantial rise at that point in the value of the Canadian dollar.

“In other words, the increase this year was made more noticeable due to the decrease last year,” he wrote.

The seven per cent increase stems mostly from the loonie’s impact on the prices of fresh fruit and vegetables, which in a category by themselves jumped 13 per cent in September 2008 over September 2007. Most other foods (meat, dairy, coffee, frozen foods) rose in price by three to six per cent.

And bakery products were up 14 per cent, Grier wrote, due to the “big rise” in commodity wheat costs, “either directly due to increased costs or indirectly due to the pervasive view that higher wheat costs lead to higher bakery costs.”

But Grier also pointed out that the seven per cent increase in the index for food bought at stores is also above the five per cent increase in the industry price index (IPI) for food manufacturing.

Chicken prices declined sharply at wholesale, but poultry retail prices rose four per cent. Dairy prices rose just two per cent at wholesale and four per cent at retail. Coffee prices were flat at wholesale but up three per cent in stores, and bakery, which jumped 14 per cent in the third quarter at retail, was up just five per cent at wholesale.

With grocery stores apparently able to add to their margins during the past quarter, it’s possible that claims of an “intense competitive environment” in Canada’s supermarket sector, blamed largely on the massive Wal-Mart chain, “may have been overstated,” Grier said.

But that situation isn’t expected to last either, Grier said, noting that in light of the “more challenging economic picture” now in Canada, Wal-Mart appears to be once again sharpening its pricing focus. Loblaw, for another, is getting its own pricing into “better competitive posture” compared to previous years.

And Wal-Mart aside, Grier points to a recent Wall Street Journal article observing that supermarkets are starting to push back against food companies that are reporting profit increases.

And with corn, wheat and other commodities coming off their summer peaks, “grocery chains are balking at food makers’ efforts to raise prices further.”

In fact, he said, citing industry analysts, not only are some chains pushing for more promotional allowances — such as two-for-one deals, to help move higher volumes — but some “are using food companies’ earnings reports as leverage to reject price increases.”

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