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Has food price war ended?

September 5, 2008

Consumers are seeing more advertising aimed at convincing them food retailers are offering big savings during the back-to-school season, especially in the harder hit Ontario market, a leading industry analyst says.

But, in fact, overall food prices are taking a bigger bite out of consumers' wallets as higher prices for some foods more than offset the savings on others, Perry Caicco, a research analyst at CIBC World Markets, wrote in a note to clients this week.

"The national (food) price wars are over," Caicco declared in a 21-page report on the state of the food industry and, in particular, market leader Loblaw Cos. Ltd.

"This does not mean the industry will be less price competitive than before. Indeed, wild price statements, strong flyers and sharp price points will continue," Caicco added.

But such campaigns are now more targeted, involve fewer items, and are less harmful to retailers' profit margins, Caicco noted.

Both major retailers named in the report, Loblaw and Wal-Mart Canada Corp., said later they continue to invest in prices and look for ways to pass on savings to customers.

In fact, while Statistics Canada reported overall food prices were 4.3 per cent higher in July compared to a year earlier, a Loblaw spokesperson said it continued to experience food-price deflation in its stores in this year's second quarter. In other words, shoppers in Loblaw-owned stores paid less than a year ago.

A spokesperson for Wal-Mart noted it had introduced a "record number" of price reductions in its stores this year and would continue to look for ways to cut costs and pass on the savings to consumers.

Still, Caicco's analysis, aimed at food company shareholders, not consumers, points to what he calls interesting, if subtle, changes in recent food retail pricing strategies.

In late July, for example, Loblaw launched a British-style campaign that touted "over a thousand new prices have been checked, locked and lowered on items customers buy the most," Caicco noted.

Given the average grocery store stocks more than 25,000 items, lowering "a thousand prices" is nothing, Caicco wrote.

Most were planned reductions that would end within four to six weeks, possibly at prices higher than before the program started, he wrote. In fine print, Loblaw noted "prices … are subject to change."

"We believe this was little more than a smart public relations program and should not result in a further reduction in (profit) margins," Caicco wrote.

Similarly, over the Labour Day weekend, Wal-Mart targeted back-to-school shoppers by announcing more "price rollbacks" involving "hundreds" of items, particularly basics such as milk, bread, eggs and butter specifically in the Ontario market, Caicco observed.

"These prices are in no way permanent and are simply part of the regular `chest-beating' that will become louder as the year advances," Caicco suggested.

A Loblaw spokesperson said the retailer's pricing strategy had not changed. "We have been very focused on providing attractive value to customers and continue to do so," said Inge van den Berg, vice-president of public affairs.

She agreed the retailer was devoting more attention to making sure consumers are aware of potential savings: "We have stepped up the level of our communication."

As for food-price inflation, the overall cost of food in Loblaw stores continued to decrease in the second quarter, though not quite as sharply as in the previous three months, van den Berg said.

Similarly, a spokesperson for Wal-Mart said advertised "rollbacks" – Wal-Mart's term for price cuts – generally stretch as long as 90 days.

"We're always committed to the best price in the market and it looks as though these prices are here to stay for the foreseeable future," Kevin Groh said of the latest cuts.

Caicco isn't the first to note an end to what had been a two-year-long price war among Ontario retailers that defined pricing trends in other markets, such as the United States.

Soaring fuel prices and global demand for grain have driven food prices sharply higher in most countries, including the U.S., where food prices are rising twice as fast.

A rising Canadian dollar that made imported foods cheaper, combined with a price war in Ontario, has helped dampen the impact on Canada.