Dive Brief:

• Food prices inched forward in May compared to a year ago, but the rate of increase wasn’t quite as high as it was in April, according to Winsight Grocery Business’s report on new federal government statistics.
• According to charts from the Bureau of Labor Statistics, prices increased 2.3% for meat, poultry, fish and eggs, but fell for everything else.
• Since inflation was slow, grocers were likely to have been locked in price wars over the last month, and may not have made expected profit, Winsight speculated.

Dive Insight:

As prices fall or stay the same for many grocery items, consumers will rejoice — or they may not notice. But grocers notice in a big way. Already low margins have shrunk even further, and there is less room to cut costs in order to stay competitive. Last month’s prices only increased in one sector. They decreased 1.3% for nonalcoholic beverages, 0.6% for dairy, 0.4% for produce, and 0.2% for bakery products, according to BLS statistics. The increase in meat, poultry, fish and egg prices just barely pulls grocery stores into having net higher prices.
This puts the entire business in a tight spot. Retailers may want to raise prices at this point since they are dealing with ever-increasing overhead. But they can’t because of competitive forces. Walmart and hard discounters like Aldi and Lidl are able to keep their prices low through scale, private labels, and purposely losing money in categories like dairy. Walmart, which generally uses its sheer size to keep prices low, even launched a comprehensive test to ensure it was keeping competitive.
What makes the squeeze even tighter are logistical issues. As transportation costs rise — a result of higher volumes, tight capacity and implementation of electronic logging devices — everyone is trying to pass that cost along. A potential tariff increase on imported aluminum and steel are also making cans more costly for food manufacturers. Companies such as B&G Foods plan to increase their prices to make up for these new costs. However, if grocery stores feel pressured to keep their prices steady, they stand to lose significantly.
Contrasting the tenuous situation with grocery retailers is the U.S. economy on the whole. The Federal Reserve hiked interest rates on Wednesday, crediting a booming economy and low unemployment rates. However, that growth doesn’t reflect much on food and grocery. While grocery stores are important to everyone, the economic advancement is concentrated elsewhere. Average consumers are also not seeing their wealth increase. Four out of 10 U.S. households currently don’t earn enough for housing, food, child and health care, transportation and cell phones, according to the United Way.
That doesn’t leave grocery retailers in a comfortable spot, and indicates more tight times are on the horizon. However, there is a silver lining: Americans will still depend on grocery stores, even if their finances are tight. According to Bureau of Labor Statistics numbers, the average American spent $4,015 on food at home in 2015 — a cost that had only increased 1.1% from the previous year. The cost for occasional meals out was almost as high — $3,008 — and had increased 7.9% in a year.