- Despite increased inflation and rising manufacturing costs, fierce competition between four high-volume retailers, Costco, Walmart, Kroger, and Target is pushing them to continue to slash their prices in recent months, according to CNN Money.
- As prices fall, reductions are increasing pressure on already struggling regional supermarket chains that have less cushion to absorb the decline, the cable network reported. In the case where German discount retailer Lidl was present, for example, local establishments cut prices by 55% compared to places where it didn't have a presence.
- Even though low prices cut into profit margins, promising low prices and great value continues to be a key way for retailers to draw in shoppers.
After several years of decreasing prices at large supermarkets, customers have become accustomed to the idea of cheap groceries. Walmart, Costco, Kroger and Target have persisted in slashing prices to give them an advantage over their competitors in drawing in customers. In recent years, the food industry has experienced a period of price deflation among the most fierce since the early 1950s. This trend, coupled with the cutthroat competition among American retailers, dollar stores and Aldi and Lidl, has relentlessly put downward pressure on prices.
Small supermarkets chains are feeling the squeeze as stores that are already operating on razor-thin margins are forced to lower prices to be competitive, which erodes profitability. Margins in the supermarket industry are notoriously low, averaging 1% to 3%. They are forced to offer things like customer service to give them an advantage.
Even the big players are starting to feel the pain of perpetually marking down pricing. It's not uncommon for a big player such as Walmart to lower prices on some items in an area only to see a competitor like Kroger do the same. Walmart also has started a new price-comparison test in at least 1,200 of its stores last year in a bid to “close a pricing gap” with discount grocery chains such as Aldi. Some retailers even offer price matching guarantees.
Predictably, 2018 inflation rates have increased and are now hovering around 2%, prompting companies to face rising costs on everything from oil to pulp. The USDA found the Consumer Price Index is 2.5% above the April 2017 level and food prices were 1.4% higher from the same time. In 2018, retail food prices are expected to rise between 0.5 to 1.5%. Still, they are below the historical average of 2.1% and will be effectively lower than what customers paid in 2015.
While many regional chains find they are forced to raise prices to compensate, big-name retailers are reluctant to pass on the price inflation to customers. In a creative effort to avoid doing so, Kroger and Walmart have devised a creative solution where they fine suppliers for late or incomplete deliveries. Costco is using tax cuts savings to invest in higher wages for workers and lower prices for food, clothing and home essentials.
While pricing is and always will be a major factor, supermarkets, especially the smaller ones, will need to continue offering more reasons for consumers to come to their store by offering them more services like restaurants, customer service and a wider selection of produce.