Food inflation has shoppers budgeting, food makers competing on prices

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Posted: Sunday, April 13, 2014 12:00 am

Janelle Shere is looking forward to summertime foods like hot dogs and picnic salads, not for a change of pace in the kitchen, but because they'll be a relief to her grocery budget.

“Macaroni salad goes a long way,” said the Bellevue mother of five.

Shere relies on coupons to stretch her grocery dollar and took note when food prices surged in January and February, especially for staples like meat and dairy, which are at or near all-time highs.

She fears that the cost of groceries — projected to jump as much as 3.5 percent across all food categories this year — will outpace any increases in her household income this year.

“Just because the grocery store prices rise, it doesn't mean he gets a raise,” she said, referring to her husband, a pipe layer.

The cost of food as a percentage of families' after-tax incomes is dramatically lower since the early 1950s — down from about 21 percent then to as low as 9.5 percent in 2008. But since the recession, it has ticked back up to 10 percent in 2012, and families like Shere's say any increase this year will mean economizing.

Forecasts vary on how much income will grow and whether that growth would offset inflation. Average wages in the mid-America region, which includes Nebraska and Iowa, are expected to grow only 1.8 percent this year, according to the most recent Creighton University business survey. However, University of Nebraska-Lincoln economists in January forecast that total nonfarm income for the state, which includes other forms of income beyond wages, will grow 4.1 percent this year, faster than inflation and faster than last year.

Food inflation this year may feel more extreme than it actually is, historically speaking, because grocery prices were flat in 2013, the U.S. Department of Agriculture said.

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The consumer price index for retail food purchases increased more in the first two months of this year than it did all last year, but it is “on track for normal annual inflation” in 2014, given the 2.8 percent average annual increase since 1990, the USDA said. (The department noted that its inflation projections could worsen if severe weather — especially drought in California — drives up prices beyond current forecasts.)

Inflation also has been noticeable for shoppers this year because prices are rising especially fast for benchmark grocery items, including a pound of ground beef and a gallon of milk.

Beef is at record high prices, rising 4 percent in February alone. Milk prices are up 2.5 percent from a year ago; a gallon of whole milk averaged $3.56 in February and dairy products will see accelerated inflation in coming months, the USDA said. Egg prices are up 5.7 percent from a year ago, the USDA said.

Shere noticed, for example, a 10-pound package of ground beef at Sam's Club recently priced at $29.99; in the past, she has paid $19.99.

Her family would not be willing to give up eating meat, but she said more price increases would “definitely” change how she feeds her husband and five kids.

“I probably would not cook as much (meat) — I might not have leftovers. I might have just enough for everybody to have a portion, and then fill with extra sides.”

Beyond supply-and-demand factors, another reason for the projected inflation this year is a possible change in the way grocery stores price items.

Since the recession and then with the severe Midwest drought in 2012, the USDA said, grocery stores have been cutting into their margins to stay competitive as consumers hunt for the lowest prices.

Omaha-based ConAgra Foods' chief executive officer, Gary Rodkin, has called it an unsustainable “race to the bottom.”

In September, Rodkin noted the “intense price competition” in the industry playing out on store shelves. He told analysts that grocers were competing heavily for shopper market share by offering deals, and other food manufacturers were spending more on in-store merchandising and promotions.

In response, he said ConAgra would shift part of its advertising budget to in-store messaging and merchandising, reaching customers right when they make the decision about what to put in the grocery cart.

Even Whole Foods, with a reputation for higher prices, said in February that in the second half of 2013 it intensified an effort started after the Great Recession to slow the rate of price growth at its stores in an effort to position its products as a better value compared with competitors. The chain said it has been willing to see somewhat lower sales and margins in order to gain customers and benefit shareholders in the longer term.

But the USDA said that across the industry, grocery margins are expected to increase this year, contributing to inflation. Rodkin also predicted that trend, noting in February that grocers “are starting to say, I'm not going to do that anymore.”

Hy-Vee, based in West Des Moines, said it held off on raising prices as long as possible, but acknowledged they're rising now.

“Margins in grocery stores are low to begin with,” said Chris Friesleben, Hy-Vee spokeswoman. “You get to the point where, everybody is in business to make money, you can only hold your prices for so long.”

For consumers, she said, “This is a hard time, with prices going up in a variety of areas at the same time.”

She suggested shoppers build their menus around weekly ads (which often highlight special purchases from suppliers), look for private-label food sales and take advantage of Hy-Vee's digital coupon service that links to a shopper's Fuel Saver card.

Still, some supermarkets and some in the food manufacturing industry are not predicting price inflation as high as the 3.5 percent USDA suggested consumers may see.

The chief executive officer of SpartanNash, which operates No Frills, Bag 'N Save, and Supermercado stores in Omaha, said in March he disagrees with the USDA's forecast. Beef prices may be up, but prices for fresh produce fell compared with a year ago, he said.

“I don't think we see necessarily in the tea leaves that we're going to be deflationary for the year,” Dennis Eidson said. “But I don't think we're going to get any robust inflation going forward.”

Kroger, which operates Baker's Supermarkets in Omaha, plans to “slightly improve” its margins in 2014, the company told analysts in March, and is expecting “low inflation.”

Kroger's CEO, Rodney McMullen, said the economic recovery remains “fragile and uneven.” He said the chain will be careful to set up pricing to appeal to different groups of customers, including offering “low entry price points” in private-label foods for those who “remain under economic stress.”

“Material costs are going up, and it's very difficult to pass along price increases to consumers in this environment,” said Bob Goldin, executive vice president of Chicago-based food industry consulting and research group Technomic. “The consumer is economizing.”

Goldin said it's risky for one food manufacturer to raise prices, given that the others might not follow. Instead, some manufacturers are shrinking product size and using lower-quality ingredients.

To make more money, he said, “At the end of the day you have to innovate.”

Grocers are also watching the effects of the roughly 5 percent cuts in federal Supplemental Nutrition Assistance Program benefits that took effect in November, when a temporary increase expired.

McMullen said Kroger's customers who use SNAP have been spending more of their own cash on food and have increased their total monthly spending. Walmart, however, blamed a 0.4 percent drop in comparable store sales for the quarter ending Jan. 31 on the reduction in SNAP benefits.

LaVonya Goodwin, program administrator at Heartland Hope Mission in South Omaha, said she is concerned that rising food prices coming soon after the SNAP reductions will put more of her clients in a bind.

She said most mission clients are working, yet need SNAP benefits to feed their families. Lately they've had to rely more on cash to buy food, she said, and have been asking for more help buying gas so they can drive to work, job interviews or medical appointments.

Tonya Filleman, a substitute teacher in the Millard area, also will be watching prices this year. Her household has its own inflationary pressures: two teenage boys, along with a 9-year-old girl and 6-year-old boy.

Filleman has increased her grocery budget from $200 every two weeks to $300, taking the difference out of her family's entertainment spending.

She watches for sales and uses coupons but said rising costs and her growing children put her and her husband, a business analyst, over budget.

“My husband typically will get raises, but I still feel like with the kids growing, we fall behind,” she said.

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