PHOENIX — Some grocery-industry observers see another price war looming, which could benefit shoppers but would be tough on retailers.
Research analysts at Credit Suisse pointed this month to a “much more aggressive promotional environment” at grocery stores amid what has been a year of flat to lower prices.
“The current landscape is now beginning to look a lot like 2009, when meaningful deflation resulted in an industry price war and multiple quarters of declining earnings,” the analysts warned. In 2009, when the rest of the nation was distracted by the steep recession and the threat of a financial meltdown, supermarket chains slugged it out in a price war focused on grabbing market share even at the expense of profit margins.
While a price war could be good for shoppers, retailers already are struggling. Sprouts Farmers Market, the Phoenix-based chain of stores focused on fresh, healthy and organic foods, this month warned of “significant ongoing deflation” that has resulted in more profit-eroding promotions and a tempered outlook for the rest of 2016, and perhaps beyond. The trend imperils the company’s streak of 37 consecutive quarters of sales increases at comparable stores, excluding expansions.
Grocery-store deflation already is happening. Average prices for the food that Americans consume at home slipped 1.9 percent over the past year through August, reported the U.S. Bureau of Labor Statistics. Prices have been especially weak for meat, poultry, fish, eggs, dairy products, cereals and bakery items. In contrast, restaurant prices, for food consumed away from home, have risen 2.8 percent over the past 12 months.
Persistent low inflation over the past several years isn’t focused solely on the supermarket industry. Stagnant wages have kept workers from gaining ground economically. Retirees have struggled to make ends meet with low yields on deposit accounts. Corporations have labored to maintain profit growth amid flat revenue. But flat to declining prices pose a special challenge in the grocery business, where sales volume counts heavily because profit margins are so thin.
Perhaps the silver lining for retailers is that they have been through it before.
“At Sprouts, we have operated and managed through similar competitive and deflationary periods,” said Amin Maredia, the company’s chief executive officer. Sprouts is focused on “accelerating traffic and sales in the current environment,” he added.
The tough competitive landscape is likely to lead to more promotions, retail analysts say. For example, special sales at Sprouts include those centered around vitamins, buy-one/get-one-free offers, frozen foods and double the normal amount of coupons on Wednesdays. “Up to one-third of the store is on promotion at any time,” said Diego Romero, a Sprouts spokesman.
The Phoenix corporation is one of Arizona’s top-100 non-government employers with just under 4,000 in-state jobs and about 24,000 across the nation. The company remains relatively healthy, with double-digit sales and profit growth, helped by store expansions, noted Zachary Fadem, a senior analyst at Wells Fargo Securities. Still, he calls the current environment “challenging” and recently cut his profit outlook for Sprouts, for this year and next.
The grocery business has been in flux anyway. Industry researcher Kanter Retail cites ongoing trends that include a focus on fresh, local, organic, natural and healthy foods. Shoppers are gravitating toward smaller stores, and discounts remain important. Technology has brought mobile coupons, pricing scanners for in-store shoppers and other changes.
Many of those trends favor Sprouts. And despite the tougher pricing climate, the company remains on track to expand from 250 stores nationwide to more than 1,200 locations over the next 15-plus years as it branches out beyond its traditional base in the Southwest.