When "Retail Deflation" Overtakes "Cost Deflation" at the Grocers

The year 2016 was rough for grocers like Kroger, SUPERVALU and Sprouts Farmers Market. Even as the Dow reached record highs, all three saw the price of their stocks sink.

More than that, grocers have grappled with two types of deflation.

One is cost deflation and the other is retail deflation.

This excerpt from a Jan. 12 article provides insights on both:

Shares of Kroger Co, SUPERVALU Inc and Sprouts Farmers Market Inc fell 17.5%, 31.1% and 28.8% respectively in 2016.

You may not have noticed much difference in the price of your grocery cart items throughout 2016, but the management teams of each of these companies certainly did. All three corporations cited deflation as a significant factor crimping both revenue and profits in 2016. …

The cost to grocers of vegetables and fruits, meats, dairy, milk, eggs, cereals, and other agricultural staples fell last year, for the first time since 2009. …

The lower costs present a problem for grocers because deflation on the cost side can spill over to the sales ledger. During Sprouts Farmers Market's third-quarter 2016 earnings conference call, CEO Amin Maredia provided a succinct explanation of how this occurs.

"When deflation expands across multiple categories and extends for several quarters, it's not uncommon to see higher promotional activity in our industry, which leads to retail deflation higher than cost deflation, and this is what we saw during the quarter," Maredia said.

This quote explains the effect of deflation on grocers and demonstrates why the phenomenon is so dangerous. It's typical for a grocery chain to pass on cost savings to customers in the form of discounts and promotions, providing an edge, at least initially, over competition. The "retail deflation higher than cost deflation" occurs when multiple grocers engage in competitive underpricing, which exceeds their initial wholesale cost savings.

This activity is known as a "deflation price war," and it's no friend to the income statements of the parties involved.

You can read the entire article by clicking on the link below:

Enter your email address to get email updates and special offers.
It's free!

* By submitting this form you authorize EWI to send regular emails and updates. You may unsubscribe from our mailing list at any time.