Earlier this month, the US Bureau of Labor Statistics revealed food prices continue to climb, outpacing the overall Consumer Price Index, to reach a staggering high of 12.4% compared to last October. While the upward momentum may be slowing, it likely won’t stop any time soon based on the most recent Producer Price Index, which showed wholesale food prices paid by manufacturers are up a whopping 10.4% year-over-year in October and 25.9% over pre-pandemic levels reported in February 2020.
Thanks in part to stimulus funds, which have since dried up, many consumers have continued to spend despite higher prices – but recent research suggests that may be changing with 84.51’s November Consumer Digest survey revealing 39% of shoppers are buying fewer groceries and 61% are cutting back on non-essentials like snacks and candy. Others are reducing how much they spend on staples like dairy, deli, produce and frozen food.
As consumers look for ways to save on their grocery bills they increasingly will be looking for deals and ways to save on everyday items, they likely will try new brands and retail banners – pushing industry players to make tough decisions about pricing, promotions, product assortment, and which services to offer and which services to discontinue as they struggle to balance consumer needs and basic business requirements.
In this episode of FoodNavigator-USA’s Soup-To-Nuts podcast, Stefan Kalb, the co-founder and CEO of the AI predictive shopper and automated ordering service Shelf Engine, argues the answer to all of these challenges, in most cases, is to simplify. He explains this means cutting back on SKUs and labor-intensive services and jobs to focus only on consumers need and are actually able and willing to buy. And while this approach may sound unsavory, he says it is unavoidable because the worst of inflation for food is yet to come.
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Grocery inflation may be slowing but it isn’t going away any time soon
Anyone following the Labor Department’s monthly CPI and PPI updates will have noticed a general slowdown in the overall upward trajectory of input costs and finished good prices – except when it comes to food – the prices for which continues to climb much higher and at a faster rate than other categories.
Kalb explains that this dichotomy stems from the food industry’s attempt to shield consumers from the full brunt of inflation in real time – creating a latency that will require longer to resolve.
“The reason why we are going to see continued inflation, with food, even as inflation may stabilize, and the rest of the economy is this problem of latency. And there is latency in the food industry, because there is this desire to absorb the shock, and to put the inflation, little by little on to the consumer,” he said.
But eventually, he added, brands and retailers will want to return to a certain level of margin parity that they had before the pandemic – and that will take time, meaning prices will continue to go up, even if costs start to come down.
Price increases likely will hit hardest labor-intensive offerings, such as deli, fresh-prepared or products that are more complicated to make, store and stock, Kalb said.
But it isn’t just prices for ‘high touch items’ that will continue to rise – they are going up across grocery categories, which Kalb argues is prompting shoppers to pullback on what they put in their carts and retailers to reduce what they stock.
As such, he predicts the center of the store will suffer more as retailers realize they cannot compete with online businesses, like Amazon, or big box stores, like Walmart and Target, which can stock and deliver shelf stable items for less than traditional grocers.
While this reduction will hit manufacturers of all sizes offering all types of products, Kalb acknowledged that younger emerging brands may suffer more as retailers are less willing to take a chance on a product or company that consumers are not already familiar with – unless it offers a value proposition.
But this doesn’t mean that startups are out of luck – simply that they may need to rethink their business model and how they structure sales agreements with retailers. For example, Kalb said, retailers increasingly are qualifying offers to buy new products with a promise that if they don’t sell the manufacturer will buy them back.
Consumers will continue to shift channels
Just as consumers are gravitating to products with a better value proposition, Kalb they also are gravitating to retailers that can offer more savings – a phenomenon that increasing is driving higher income consumers who make upwards of $100,000 a year or more to shop alongside lower income consumers at Walmart. The result is a more competitive landscape that will require retailers to adopt creative solutions to lower prices and drive foot traffic.
Kalb notes that Target and Dollar General are also big winners in the current grocery war – underscoring how consumers are open to shopping for food at unconventional stores if it means they can lower their overall bill.
This shift will test strategies favored by higher-end stores, like that of Sprouts Farmers Market, which recently removed itself from the price-cutting war in favor of offering more exclusive or limited products that shoppers will pay more for because they can’t find them elsewhere. But Kalb says he is dubious of this proposition – noting that as household budgets continue to tighten the total at the end of the receipt will become more important than recreating a restaurant experience at home or trying something novel.
The center of the store will shrink
Kalb predicts this will push retailers to rethink their assortment – not only to offer less expensive items, but also less items overall – starting with those in the center of the store.
“It is really costly for groceries to stock center-store. They do it because they just want you as a customer to come in. But at the end of the day, Amazon is going to be able to outperform on margin for many of those items,” along with stores like Costco, Kalb said.
He acknowledged that the idea of SKU rationalization isn’t something that everyone will want to hear, but they need to so they can evolve to the next phase, which will champion less waste and more thoughtful selection that is easier to stock and to shop.
This is one area where he says Shelf Engine shines – in helping retailers accurately predict what will and won’t sell and how much to buy of each product when.
Ecommerce will slow, continue to evolve in a more simplified fashion
Another area where Kalb predicts there will be downsizing due to inflation is within ecommerce, which is a bit of controversial viewpoint with many retailers and brands leaning heavily into it.
“The balance of power has shifted a bit. So, whereas during the pandemic, all of a sudden, you had the Instacarts of the world and DoorDashes of the world to just open an enormous amount of power – now that is readjusting a bit as the online delivery is going down,” Kalb said.
He explained that as shoppers look to stretch their dollars they will look to redirect what they would have spent on deliver fees to buying more food for themselves and their families.
Kalb is quick to note that a shift away from ecommerce is not a shift away from technology. Quite the opposite – he argues that investing in technology, especially in the back of the store, will become essential in the coming years to effectively and efficiently meet consumer demands.
He explains that by updating back-of-store technology, retailers will streamline their labor needs and improve their ability to accurately stock what consumers want – saving money on labor and goods.
Those who are interested in learning more about better managing their back of store with help from technology and using AI to potentially better predict inventory and orders can learn about Shelf Engine at shelfegine.com, where they can also find the company’s recently published report, The Aisle Ahead: Shelf Engine Grocery Outlook, which digs deeper into the challenges 2023 will bring and the strategies grocers will deploy to combat them.