Dive Brief:

• The latest price index report from the U.S. Bureau of Labor Statistics finds that consumer prices recorded their biggest increase (+0.5%) in eight months in September. Unfortunately, the tide didn’t lift all boats, with food prices remaining fundamentally flat. The food price index eked out a negligible 0.1% increase, led by inflation creeping back into the food-away-from-home (dining out) index, which rose 0.3% in September. The food-at-home index, on the other hand, remained unchanged in September after dropping in August.
• Grocers continue to take a hit in the all-important margin-building perimeter departments. The index for dairy and related products fell 0.6%, on top of a 0.4% decline in August. The index for meats, poultry, fish and eggs also fell in September (-0.4%). Beef prices are down, but pork and chicken prices are increasing, according to Urner Barry Newswires. The index for fruits and vegetables fell 0.2%.
• On a somewhat upbeat note, the food-at-home index is up 0.4% in the past 12 months. In comparison, the food-away-from-home index has risen 2.4%. Higher prices to dine out could mean more people heading instead to the grocery store to take advantage of cost savings associated with eating at home.

Dive Insight:

Food price deflation has been a long-term problem plaguing the grocery industry. While great for shoppers, a deflationary food price environment is not good for the grocery industry. During the year, many grocers have reported struggling with sales softness and underwhelming profit performance, due in large part to the price wars that have broken out in this hyper-competitive environment.

Fierce competition among grocers, especially discounters, has fueled food price deflation. As expanding retailers such as Aldi begin to amass more market share and newcomers like Lidl threaten to disrupt the grocery space with deep discounts on premium products, grocers have slashed prices on commodity products including meat, eggs and dairy. Take into account an encroaching, price-competitive Amazon, which also tends to push prices down, and it’s not a pretty picture for the grocery industry.

Kroger’s profits fell 7% in its second financial quarter compared to the same period last year, mainly due to price cuts the company has instituted throughout its stores. Company stock took a hit following its second quarter report in September. Some good news, however, is that Kroger same-store sales once again turned positive (+0.7%) following two consecutive quarters of declines. It remains to be seen what will happen in the third quarter, however, given the latest food price index figures.

Walmart said that its second quarter gross profit margin decreased as price reductions in key markets and the growing mix of its e-commerce business hit the gross margin rate. Still, the company said that U.S. same-store sales grew 1.8% with traffic growth of 1.3%, the twelfth consecutive quarter with positive comp sales. Falling food prices could be a good thing for Walmart, which in addition to grocery operates a huge general merchandise business.

Low food prices drive store traffic but it also gives shoppers more change in their pockets to spend on discretionary items like apparel, home goods and electronics. This is a prime opportunity for Walmart and other retailers with a strong nonfood presence to entice shoppers to spend on higher-margin discretionary items.

Across the grocery sector, falling food prices also provide retailers the opportunity to increasingly emphasize higher-margin areas of the store, like health and beauty and general merchandise. Highlighting margin-enhancing value-added products — like prepared foods, meal kits and foodservice departments — could help boost sales and profit performance too. It's also good timing as the cost of dining out continues to rise.