Food prices have been a hot topic since the pandemic and the high inflation of recent years. Nowadays, bringing the topic to the center stage are Vice President Kamala Harris—the Democratic presidential nominee, with her proposed ‘grocery price-gouging ban’—the Federal Trade Commission (FTC) and Department of Justice (DOJ), with their inquiry into grocery prices, and U.S. Senators Elizabeth Warren and Robert Casey, who wrote a letter to Kroger CEO Rodney McMullen regarding the use of Electronic Shelf Labels and surge pricing. The Consumer Price Index released on August 21 showed that food at home is up 26.9% since 2019.
“Many of the big food companies are seeing their highest profits in two decades. And while many grocery chains pass along these savings, others still aren’t,” Harris recently said during a speech in Raleigh, N.C. “Look, I know most businesses are creating jobs, contributing to our economy and playing by the rules, but some are not, and that’s just not right, and we need to take action when that is the case.” Harris said her plan would have penalties “for opportunistic companies that exploit crises and break the rules.”
While some may think that supermarkets are price gouging, the reality is that while their net profit pre-pandemic stood at around 1.5%, since then their net profit has risen to close to 2%. In perspective, it is not a huge increase. Where we have seen substantial increases has been from the consumer-packaged goods (CPG) brands—and those increases have for the most part been passed on through the supermarket to the shopper.
Food inflation isn’t just a statistic; it’s a phenomenon that affects each one of us on a daily basis. It stems from a variety of sources—increased production costs, increased labor and materials; here in California with the $20 minimum wage, we are seeing the impact as people leave their jobs in supermarkets and restaurants to join McDonald’s or Chilis, where they can make up to $25 an hour.
Then we have logistical challenges, including transportation—where we are down over 100,000 long haul truck drivers, and costs of dry and refrigerated storage continue to rise—market demand fluctuations, and, most importantly, environmental impacts like droughts or floods, which can devastate crops and livestock populations. Current trends indicate a steady increase in the prices of staples such as wheat, dairy and meats.
This uptrend is exacerbated by global economic pressures and geopolitical tensions that disrupt trade flows and supply chains—the Ukraine-Russia war has affected global supplies of edible oils and grains—forcing prices even higher.
Over recent months, retailers have been lowering prices including on groceries: Walmart 7,200, Target 5,000 and ALDI 250 items, to list just a few banners that hope to lure shoppers in advance of the food-centric holiday shopping season. Walmart raised its full-year forecast on August 21 and said a big reason for its recent success is that wealthier households are shopping there, delivering market share gains.
Both Target and Walmart have significantly increased their assortment and quality of private brands through the Good & Gather and bettergoods labels, respectively, adding yet more challenges for CPG brands. John Rainey, Walmart’s CFO, said in September that the retailer is “seeing private brand penetration continue to increase.” According to Jefferies, a research firm, private label brands in August continued their growth, with 56% of the 75 food categories that they track gaining share. Target’s CEO Brian Cornell is also hitting back. On August 21 he appeared on CNBC’s “Squawk Box” to argue that there is no room for price gouging in a sector as competitive as retail, where margins are thin.
Taking the lead from Carrefour CEO Alexandre Bompard’s 2023 effort to pressure CPG companies to negotiate better pricing in France, during Walmart’s 2024 second-quarter earnings investor call, CEO Doug McMillon said that the retailer is aggressively fighting back against price increases from brand suppliers, “because we think prices need to come down.” Purdue University’s latest Consumer Foods Insights Report shows that food inflation remains stable at 2.2% for the fifth month in a row, and that consumer food inflation estimates and expectations continue to drop and are at the lowest level since the survey began in January 2022.
Retailers have to balance cost management with competitive pricing strategies to attract and retain customers. The reality is that this holiday season retailers will still be grappling with labor shortages and increased labor costs. For shoppers, it will mean slightly higher prices—but not price gouging on the shelves.