Grocers increase promotions as deflation eases
- With food deflation beginning to subside, grocers are quickly passing higher prices onto consumers, says Smart & Final CEO Dave Hirz, according to Supermarket News. At the same time, aggressive promotions are being used to generate store traffic.
- “It looks like perishable cost increases get passed through much faster than non-perishable cost increases,” Hirz said during a conference call, Supermarket News reports. “It's not a matter of weeks, it seems like it's a matter of days as beef or produce or dairy increases that we see the impacts of that — of the shelf-edge in our competitive price checks.”
- Hirz also noted that ads have heated up with hotter promotional activity among conventional competitors, saying, “It’s a handful of items every week, but just enough to make this [environment] a little more promotionally intense.”
While great for shoppers, a sustained deflationary food price environment is not good for the grocery industry. Many grocers have reported they are struggling with sales softness, due in large part to food price deflation and intense competitive pressures.
The U.S. Department of Agriculture expects supermarket prices to change between -0.25% and +0.75% in 2017. However, poultry, fish and seafood and dairy prices are expected to rise this year compared with price declines in 2016, according to the USDA. As Supermarket News reports, Smart & Final CEO Dave Hirz said that retailers aren't hesitating to quickly pass respective price increases onto consumers.
At the same time, however, an uptick in promotional pricing has been noted across the grocery sector. Price promotions have long been used by grocers to drive shopper traffic into their stores. Once there, the idea is that they’ll buy more than just sales items, loading up their carts with higher margin goods too. Unfortunately, with so many shopping options and retail deals across the board today, this may no longer be the case.
Recent research by Magid shows that half of U.S. consumers aren't loyal to any single grocery store and are going many places to check off their shopping lists. This means consumers are likely cherry picking stores for the best prices and deals on everyday staples — or going online to do so — and then rounding out the remainder of their food and grocery needs at stores based on selection. This leads to very fragmented shopping on the part of consumers — behavior that challenges retailers to be on their game with competitive and promotional pricing.
A key problem with aggressive promotional pricing and steep discounts, however, is that it conditions consumers to cherry pick and forward buy, neither of which is good for grocery’s long-term performance. Sales bumps due to pricing promotions can reduce a grocer’s already razor-thin profit margins. Furthermore, forward-buying of products — or when shoppers stock up on heavily promoted products — can actually lead to a dearth in subsequent demand while shoppers wait for the next promotion or better deal. This can become a vicious cycle — as seen in the apparel retail world.
Studies, such as one conducted by First Insight, have pointed to shoppers’ affinity for huge apparel markdowns and sales. As discounts on apparel became steeper and steeper — particularly during the Great Recession — it conditioned consumers to wait for the next round of promotions, at times up to 30%, 40% or half off and more. This kind of model is unsustainable over time, and many clothing retailers — American Apparel, The Limited, Rue21 and Wet Seal, among others — paid the price.
So while heavy promotional pricing can indeed draw consumers into the store, grocers must be wary of the long-term performance consequences. They should also be concerned about shopper reaction once promotional pricing lifts and higher inflationary prices are revealed.
- Supermarket News Promotions intensify as deflation subsides
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