Grocery margins seen rising, but not for long

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

A Nov. 13 essay by Kevin Grier, senior market analyst for the Guelph-based farm think-tank, points to a seven per cent increase in Statistics Canada’s consumer price index (CPI) for food bought from stores in September this year compared to September 2007.

That’s the biggest such hike in at least 10 years, Grier wrote, noting increases of just three per cent for nonfood retail items and for food bought at restaurants.

However, Grier wrote, the larger hike in September 2008 (compared to the 10-year average of two per cent) was mostly because pricing at stores was dropping in September 2007. “In other words, the increase this year was made more noticeable due to the decrease last year.”

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.

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.

As it looks like grocery stores have been 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, in light of the “more challenging economic picture” now in Canada. Wal-Mart again seems to be “sharpening” its pricing focus; Loblaw is also now pricing for “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.

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

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