As grocery prices plunge, shoppers feast on savings

Fierce sales competition batters chains

A woman shops at a Kroger grocery store in Birmingham, Michigan, on March 1, 2016.
A woman shops at a Kroger grocery store in Birmingham, Michigan, on March 1, 2016.

Food prices have fallen for nine straight months in the U.S., according to data from the U.S. Department of Agriculture's Economic Research Service. It's the longest streak of food deflation since 1960 -- with the exception of 2009, when the financial crisis was winding down.

The Bureau of Labor Statistics said the price of grocery items was down 1.6 percent on a seasonally unadjusted basis in the 12 months through July.

Analysts say low oil and grain prices, as well as cutthroat competition from discounters, are behind the deflation. Grocery store chains are said to be struggling. In some cases, their stock prices are taking a hit.

Consumers, however, are winning, analysts say.

In Austin, Texas, Randalls slashed prices for boneless beef ribs by 40 percent, to $3.99 a pound. Not to be outdone, the H-E-B grocer down the street charged $1 a pound less. Albertsons recently advertised a price not normally seen on finer cuts of meat: "buy 1 get 1 free" specials on "USDA Choice Petite Sirloin Steak."

At a Wal-Mart store in North Bergen, N.J, a dozen eggs are selling for $1.14. A mile away, at an Aldi, the German supermarket discounter, 12 eggs were priced recently at 99 cents. A year ago shoppers would have paid, on average, three times that price.

Eggs and beef have become especially inexpensive, and it isn't only an American phenomenon: In England, Aldi recently offered its prized 8-ounce wagyu steaks from New Zealand for about $6.50 -- a little more than the price of a pint of beer.

"The severity of what we're seeing is completely unprecedented," said Scott Mushkin, an analyst at Wolfe Research who has studied grocery prices around the country for more than 10 years. "We've never seen deflation this sharp."

Mushkin, who researches local markets, recently found that prices of a typical basket of grocery items in Houston had fallen almost 5 percent over the past year.

Mushkin cites, in part, the discerning behavior of shoppers such as Manny Sinclair. On a weekday lunch break, the 43-year-old contractor stopped by a Wal-Mart store in Secaucus, N.J., to pick up turtle food and paper towels.

Sinclair typically buys groceries at his local ShopRite but has recently noticed the bargains he now finds at discounters. He glanced at the meat case, where a 12-pack of "Angus steak burgers" cost $15.82, and grass-fed ground beef was selling for $4.96 a pound.

Sinclair was intrigued but figured he might find even lower prices elsewhere. Along with two Wal-Mart stores, a Target store and an Aldi store, the area has even a Family Dollar that features a small refrigerated section.

"Wherever I find the good deals -- that's where I'm at," Sinclair said.

At first, falling prices helped grocers. Low-cost commodities pushed down the tab for meat and packaged food, and increased profits. Now deflation has turned ugly for the industry. Led by Wal-Mart, retailers are pushing down prices, eating away at profit margins.

"It starts to border on irrational pricing," said Jennifer Bartashus, an analyst at Bloomberg Intelligence. "People are lowering prices just to draw traffic, without thinking about their margins."

Supermarkets are facing competition not just from Wal-Mart and Aldi stores but also from dollar stores and online retailer Amazon.com.

In recent years, Kroger -- the largest grocery store chain in the U.S., with nearly 2,800 stores -- cut prices to compete with Wal-Mart and managed to increase its market share and sales, but deflation has been hard on the supermarket chain. The company's stock has lost more than a quarter of its value this year as price cuts weighed on profits. Chief Executive Officer Rodney McMullen expressed frustration that many customers don't even notice.

"The other thing that's always hard is getting your message out, because it's fascinating -- in our research, most people are saying their basket of goods costs more money," McMullen said on a call with analysts this month.

Information for this article was contributed by Lauren Etter of Bloomberg News.

A Section on 09/28/2016

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