retail news in context, analysis with attitude

The Wall Street Journal reports this morning of an incipient increase in tension between food retailers and manufacturers. It lays out like this:

Because of increased commodity costs, manufacturers raised their prices. Which forced retailers to increase their prices. But now, as costs such a fuel come down, many manufacturers seem to be showing no inclination to lower their prices, which is creating some conflict with retailers that want to respond to toughened competition and an economy in decline with lower prices and deals for shoppers.

According to the story, “Some retailers are using food companies' earnings reports as leverage to reject price increases, according to industry analysts. Others are pushing for more promotional allowances -- such as buy-one-get-one-free deals -- to help move higher volumes of goods … Traditional supermarkets are under growing pressure to compete on price with low-cost grocers such as Wal-Mart Stores Inc. and Germany-based Aldi Einkauf GmbH. Some retailers have suffered as consumers trade down to discount stores and cheaper store-brand goods.”

Walmart, for one, has made its position perfectly clear.

The Journal reports that “during a meeting with analysts earlier this week, Eduardo Castro-Wright, chief executive of the Wal-Mart Stores division, said declining oil prices should affect the prices of store items. ‘We will aggressively look for opportunities’ to share cost savings with customers, he said.
"’We're always having discussions with our major suppliers about cost prices – either because they've approached us about an increase or we've approached them asking them to review their prices,’ said Dominic Burch, a spokesman for Asda, the U.K. unit of Wal-Mart. ‘As a retailer that is growing its volumes significantly, we also expect our suppliers to invest in that growth, sharing the economies of scale they are making with our customers’.”

KC's View:
Both sides of the street in the food industry have to be aware that shoppers are extremely cognizant of the fact that commodity and energy costs are coming down, and will react with displeasure if they see companies reaping increased profits that seem out of line with a down economy.

It is the rare US household, for example, that is looking at headlines this morning and saying, “Gosh, isn’t it wonderful that Exxon Mobil had record profits of $14.8 billion in the third quarter.” Gas prices may be down now, but the wounds of four dollar-per-gallon gasoline are recent and still open…

Food retailers and manufacturers need to be cautious.