I have operational experience in the food retail industry spanning five decades. My industry experience extended to ownership of five Long Island-area supermarkets, successfully sold in 1995. I still follow the food retail sector and am interested to see several industry trends emerge tied to rising agricultural commodity prices.
Since summer 2010, prices of key food ingredients such as dairy, grains, sugar, and coffee have increased dramatically, on basket-average more than 20 percent since 2009. Food company hedged positions have delayed the impact of these price increases, but with these hedges expiring, consumers are finally starting to feel the effects at the retail end. Major players, such as General Mills and Kraft, have already announced substantial price increases on a range of products for the second half of 2011, should commodity prices remain at current levels. These same market forces are exerting pressure on supermarket private labels, with across-the-board price increases expected. Supermarkets are also trying to derive more revenue from private-label brands through high-quality natural and organic products that often offer higher margins.
Another significant food trend involves “channel blurring,” wherein large grocery selections feature at an increasingly diverse grouping of retail outlets. CVS and Walgreens aim to drive traffic to drug stores through increased selection of dairy, meat, and fresh bread products. At the same time, Target continues to expand its Pfresh retail format throughout its full range of stores. The increased competition has actually been limiting price increases of many grocery items that would otherwise reflect base-cost increases.
Another effect of rising commodity prices is in encouraging a new wave of strategic partnerships, as well as mergers and acquisitions, among large food producers. Following a strategy already successfully pursued by corporations including Kraft, Ralcorp, and TreeHouse Foods, companies such as Nestle and PepsiCo are eyeing smaller food companies for takeover. This may also aid in countering rising commodity costs through the distributional, marketing, and production efficiencies derived from consolidation. The downside is that monopolies may eventually emerge on certain products, driving prices higher.