Dive Brief:
- Falling food prices, increased competition and the threat of deep discounters are pushing grocery chains to cut food prices to try to increase store traffic and sell larger food quantities — thinning their profit margins, according to USA Today.
- The U.S. Department of Agriculture’s Economic Research Service said prices at the grocery store dropped 1.3% last year compared to 2015. Items such as meat, chicken and eggs have seen some of the largest decreases in prices due to oversupply and lower than expected exports.
- "We’re definitely in a prolonged deflationary period," Kelly Bania, a senior analyst at BMO Capital Markets said.
Dive Insight:
Food price deflation has been impacting the industry for almost a year now, with most grocers of all kinds seeing negative number in 2016. This led to retailers posting an 11-month span of year-over-year sales declines, one of the worst drops since the early ’50s.
Food prices continue to fall as grocery retailers try to pass on cost savings to customers to gain a competitive edge. But with declines continuing, it’s hard for retailers to be successful.
The strengthening of the U.S. dollar has also had a substantial affect on declining food prices overall, resulting in slowed exports and improved imports. The USDA said that the export decline will come in around $1 billion for 2016, with imports increasing by an estimated $7 billion.
As this deflation continues, more grocery stores are slashing food prices to try and stay afloat — Costco has cut some of its food prices by as much as 50% — but it's unclear whether this will work as a long-term solution or just an industry bandage. Some smaller stores have already been forced to reduce staff. With no end to this deflation in sight, more will likely have to follow.