Grocery Prices On The Rise

COMMODITY COSTS THREATEN BUSINESS PROFIT

A shopper browses through the fruit and vegetable aisle Wednesday at Harp’s in Springdale. Price hikes for fresh fruit and vegetables are often tied to weather issues.
A shopper browses through the fruit and vegetable aisle Wednesday at Harp’s in Springdale. Price hikes for fresh fruit and vegetables are often tied to weather issues.

Consumers like Carrie Perrien Smith of Rogers wonder if they can afford the cost of a recovering economy given the hefty jump in food and commodity prices in recent months.

Smith spent $220 last week for her usual basket of groceries, noting 18 months ago those same basic goods cost her roughly $140.

The 57 percent price spike is obvious to Smith who uses a cash envelope system to buy essentially the same products every visit at her local grocer.

“I am brand loyal to the discounted labels and buy very little processed food because of allergies,” Smith said. “I cook mostly from scratch and don’t buy a lot of meat.”

Smith worries consumers haven’t seen the worst of risinggrocery costs and analysts agree.

The U.S. Department of Agriculture expects food infl ation to average 3 percent to 4 percent this year, led by steadily increasing meat, dairy and grain prices.

John Silvia, chief economistwith Wells Fargo Securities, expects food prices to rise as much as 5 percent in 2011 after remaining flat through most of 2009 and 2010. He notes disappointing harvests around the world have led to sharply higher prices for key food commodities like corn, wheat and soybeans.

Silvia and other analysts expect inflationary prices to ripple through the food chain in the coming months.

The recent grocery price hikes sting consumers especially hard following two years of virtually no inflation, according to Rich Yamarone, senior economist with Bloomberg Economics in New York.

Smith, owner of four dogs, said her sticker shock was first notable on the pet food aisle as rawhide prices have doubled since last summer.

Elevated live cattle prices and hide values not only mean Smith must dig deeper into her pocket for dog treats, but her husband’s hamburgers are also more expensive.

Wholesale beef prices jumped more than 23 percent in the last year, according to Stephens Inc.

“It’s not just the price increases, I have also noticed the liquid soap doesn’t last as long and the marshmallows don’t go as far in the Rice Krispies treats I make each week,” Smith said.

That’s because a number of manufacturers like Kimberly Clark and General Mills admit to reducing package sizes instead of raising prices. Items like Scott toilet tissue rolls shrunk by 9 percent and Haagen-Dazs ice cream containers are 12.5 percent smaller, according to Consumer Reports.

Thomas Jensen, marketing professor at the University of Arkansas, said there are a number of reasons manufacturers are shrinking package sizes.

“The obvious is rising commodity prices exerting pressure on operating margins, but retailers arealso looking at shrinking household sizes as more baby boomers become empty nesters. And we can’t dismiss the heightened competition among retailers that are each trying to balance low price with best value to keep their customers,” Jensen said.

Economists say there is no escaping higher food commodity costs which not only pinch consumer pockets, but also squeezes profi ts for manufacturers, retailers and restaurant owners.

Yamarone isn’t sure how successful food companies will be in passing along those higher costs to consumers already facing rising fuel prices and stagnant wages.

Americans only have so much to spend on food and will be making well-thought out choices this year on how they will feed themselves, according to Harry Balzer, analyst with NPD Group, a market research fi rm.

Balzer expects to see broader consumer interest in coupons and discounts and more private label purchases that allow the most bang for the buck.

Grain Grief

Food processors like Tyson Foods operate with one eye on their business and the other monitoring grain costs. The Springdale meat titan said earlier this month the company expects to shell out an extra $500 million this year to cover higher corn, wheat and soybean prices.

Tyson expects to cushion that hike with $200 million in cost savings generated this year from internal improvements that streamline chicken plant production.

But Tyson CEO Donnie Smith said consumers will also be asked to pay morefor the meat they consume in 2011 whether they chose to eat at home or dine out.

Corn represents about 40 percent of the cost of raising a live chicken and Tyson Foods slaughtered 99.2 million head last year.

Grain prices have been volatile since the end of June when corn began its upward hike from $3.30 per bushel, trading above $6.90 this past week, said Gene Martin, commodity analyst with the Arkansas Farm Bureau.

He said there is no real impetus for corn or soybean prices to recede in the near term given the tight global supplies relative to demand. With the next planting season several months away, Martin expects elevated prices through the summer months.

Tyson reported the company had secured enough corn to feed its chickens through September, but it intends to push chicken prices higher as necessary.

ConAgra Foods will increase prices on more than half of its U.S. products by April in hopes of offsetting the rising cost of meat proteins and grains, according to CEO Gary Rodkin.

Rodkin told analysts last week the company’s frozen food sector, which includes Healthy Choice and Banquet brands, will see significant price changes.

Stephens Analyst Farha Aslam recently noted Hormel has instituted two waves of pricing increases to counter higher commodity costs.

Middle Squeeze

Deborah L. Weinswig, analyst with Citi Investment Research, said food prices are just now beginning to rise, putting pressure on grocery retailers like Walmart who pledged to keep prices level in 2011.

Jensen agreed that lowcost retailers f nd themselves squeezed between the promises made to customers and price hikes coming from suppliers.

He said raising prices is tricky for retailers like Walmart that moved toward offering better values in recent years.

“The better value doesn’t always have the lowest price tag and in this challenging economy plenty of shoppersare watching every penny,” Jensen said.

Bill Simon, president and chief executive officer of Walmart U.S., said Tuesday the retailer saw inflation in dairy, meat and produce in the fourth quarter, Nov. 1 to Jan. 31.

“Weather issues have affected crop availability in produce, and we expect to see continued inflation in fresh food categories,” Simon said in a prerecorded earnings call.

Walmart spokesman Greg Rossiter said the retailer will continue working with suppliers to reduce price increases.

“It is one of the benefi ts of the buying power we have,” he said.

Simon said Walmart would only pass along price increases when they cannot be avoided.

Kim Eskew, president and chief operating officer of Harps Food Stores, said he does not like increasing prices, but it is sometimes unavoidable.

He said the grocer tries to absorb cost increases, but after six to eight weeks of price hikes from manufacturers they need to make adjustments.

“We’re not in business to lose money,” he said.

Eskew points to rising commodity prices and cold weather as causes of the higher prices.

He points to wheat prices as an example. The commodity’s cost is up 95 percent from last year and a loaf of bread made in the Harps bakery costs 10 cents a loaf more to make. Eskew said they have absorbed that increase for about four months.

Problems caused by weather create a double whammy, he said.

“Not only has the price gone up, but the product isnot as good,” Eskew said. “It’s hard to feel good about that.”

Menu Pressures

The menu at Neal’s Cafe in Springdale offers fresh squash, but owner Micah Neal said the popular vegetable is no longer served after the price jumped from $19.95 a case to $41 two weeks ago.

Neal said a recent hard freeze in Mexico is to blame for the latest price hike for numerous fruits and vegetables.

“Coca-Cola raised prices 8 percent in January because of higher corn costs and coffee is going up $1 per pound next month. I had no choice but to raise menu prices last week by 10 cents per item,” he said.

Since last July, Neal said the local restaurant economy looked to be improving, now he fears rising gas and food prices will reverse that trend.

Bill Mathews also has his eye on coffee prices. The McDonald’s franchisee said McCafe sales account for 10 to 15 percent of business at his 33 restaurants.

“We bought some futures on coffee, so we are OK right now,” he said.

Mathews is paying $550 more for tomatoes at each restaurant during the next eight weeks because of the freeze. He is not raising prices, but will absorb the $18,150 and hopes it’s temporary.

He sets his own menu prices and said they are not going up now.

“Our customers are very sensitive to pricing, and they will notice,” Mathews said. “We are very cautious about raising prices.”

CHRISTIE SWANSON CONTRIBUTED TO THIS REPORT.

Business, Pages 12 on 02/27/2011

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