What Grocers Teach Us About U.S. Economy

Forbes:

John Wood, owner of The Green Grocer, a natural foods retailer in Portsmouth, R.I., is feeling the squeeze.

As the U.S. economy flirts with recession, another toothy threat looms: inflation. And there are few places where those rising prices sting more than in the grocer’s aisle.

“[I've raised prices] just three to four times per year,” in the past few years, says Wood, 38. “Now, we have to raise prices every two to three weeks.”

Grocery bills say a lot about how buyers and sellers behave in an inflationary economy. One clear takeaway is that, fundamental as they are to our everyday lives, grocers don’t seem to have a lot of pricing power.

“It’s not in the grocer’s best interests to take advantage of inflation,” says Karen Short, a food retail analyst with Friedman, Billings, Ramsey. With all the competition–there are now 35,000 food retailers in the U.S., each generating a minimum of $2 million in sales–customers have plenty of alternatives. Jacking up prices “might have worked five or 10 years ago, but not anymore,” says Short.

When wholesale prices go up, grocers’ already razor-thin margins shrink even more. In decent economic times, Wood’s average mark-up is around 40%–most of which gets gobbled up by wages, electricity, rent, marketing, insurance and equipment maintenance. These days, his average mark-up has slipped to 30%. And 10 basis points of lost margin can really sting in a business where typical net margins are between 1% and 5%, as estimated by USDA economist Ephraim Leibtag.

Photo by transitionculture.org.

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