Private Label Buyer
PLBuyer Index

PLBuyer Index: Private Label and Looming Food Price Increases

Retailers are poised to make higher price increases than national brands, but will inflation hamper or help?

May 1, 2014
PLBuyer Index May 2014

In the last week of March, the USDA revised its forecast of consumer prices related to food, anticipating that the relatively low levels of price inflation seen in 2013 would end, and 2014 would see inflation return to more “historical“ levels (as longs as there are no unusual weather events during the major growing season). But they called out specifically meat, dairy and eggs, as well as fresh produce, as areas where food prices—both inputs and consumer prices—may outpace the average expected inflation. In other words, a lot of the most basic food-for-home purchases may get more expensive this year, and after a relatively flat year in 2013, it may come as bit of a shock to both retailers and consumers.

The weather is also impacting prices. FAO recently noted that sugar prices have risen by 14 percent, and its Food Price Index is up over 5 percent. Drought out West has caused price spikes for corn and wheat, as well as for various produce and dairy items. Internationally, the situation in Ukraine—a major wheat exporter—is likewise impacting wheat prices, affecting cost inputs for products, like breakfast cereal, that use the grain. And the drought in Brazil is impacting coffee prices.

 

Index Takeaways

The USDA says that grocery store prices have increased 2.8 percent per year, on average, since 1990. In 2013, prices increased 0.9 percent. In looking at our PLBuyer Index data, we found that national brand prices increased 1.14 percent for the 52-week period ending January 26, 2014 vs. the year-prior period, but we also found that private label prices increased 1.83 percent.

Our Total Store data includes non-food items, including General Merchandise, which explains some of the difference. However, the rise of food prices might negatively impact retailers’ ability to close the price differential gap between private label and national brands, currently averaging a gap of 18.6 percent in favor of national brands.

Retailers appear poised to make price increases that outstrip the price growth of national brands. Over the last year, across several categories, retailers were able to outpace national brand price changes and maintain them through the high-volume holiday season. However, to get a “cleaner“ perspective on the data, it’s worthwhile to dive deeper into one category in particular: Dairy.

 

The Dairy Dilemma

Dairy is a valuable category to explore around pricing, because it reflects a lot of those private label pricing gains that retailers have managed to achieve. In 2012, private label dairy had something of a tough year when it came to price parity. National brands and private label started the year with price differences literally measured in fractions of pennies. They ended 2012 with a $0.04 spread.

Keep in mind that the price differential between private label and national brands in dairy is very small—averaging around 2 percent in 2012. But while national brands maintained a very slow, but steady, hike in 2013, beginning the year at an average price of $2.59 and ending it at $2.61, private label started at $2.53 and ended at $2.59—a 2.1 percent price increase that narrowed the price gap to about 1 percent.

But rising commodity prices may significantly change the game—and the stakes. The USDA predicts that grocery margin dollars will improve as a natural result of rising commodity prices, though that assumes that grocers will maintain their margins and pass those price increases directly on to consumers. It’s a fair assumption—retailers and manufacturers have absorbed quite a few cost increases over the recent economic downturn. In the years following, they have not easily been able to recapture those costs, including over the past year or so as things seem to be perking back up.

Do rising prices mean trouble ahead as retailers seek to close the gap between national brands and private label? In Dairy, at least, the short-term answer appears to be no. In looking at the 4-week data for Dairy, both national brands and private label took some price increases in the run-up to the holiday season. In January 2013, both retailers and national brands also gave back some of those price increases.

In January 2014, national brands dropped their prices. Conversely, private label brands raised them, achieving a price premium for the first time since we’ve been tracking the data.

 Whether private label Dairy will be able to maintain this premium over time remains to be seen. However, the new big trend to watch for 2014 is clear: Private label has been poised to make big moves to close the price difference with national brands. Will inflation hamper those moves, or provide a cover for their strategic move on national brands? Only time will tell.  


About Our Partners


About IRI
IRI (www.iriworldwide.com) is a leader in delivering powerful market and shopper information, predictive analysis and the foresight that leads to action. We go beyond the data to ignite extraordinary growth for our clients in the CPG, retail and over-the-counter healthcare industries by pinpointing what matters and illuminating how it can impact their businesses across sales and marketing.

About Retail Systems Research
Retail Systems Research (www.retailsystemsresearch.com) is the only research company run by retailers for the retail industry. RSR provides insight into business and technology challenges facing the retail industry ecosystem, and thought leadership and advice on navigating these challenges for specific companies and the industry at large. Collectively, RSR’s analysts have nearly 75 years of experience as retailers, spanning grocery, fashion, specialty and restaurant/hospitality. Our backgrounds encompass store operations and workforce management, supply chain, merchandising, marketing, and IT. We work with retailers and solution providers large and small. Our philosophy is simple: your success in the market is our success.