Cheaper food is great news (unless you’re Kroger)

The price of food purchased in supermarkets dropped in 2016 – the first time in 49 years that U.S. consumers haven’t paid more to fill their pantries, according to new federal data.

Retail food prices dropped 1.3 percent total last year versus a historical annual increase of cor4 percent, according to the U.S. Department of Agriculture. While the lower costs are giving shoppers some relief on items ranging from eggs to bacon, it’s creating havoc for supermarket operators such as Cincinnati-based Kroger, which earlier this month announced the end of a 13-year winning streak in sales growth at stores that were not recently constructed or expanded.

Even if consumer demand remains solid or grows, a broad-based drop in food prices can erase that progress and dent a grocer’s sales and profitability – a perilous threat in a low-profit-margin business. Kroger’s stock took another hit as it trimmed back expansion plans for 2017.

So what’s behind the falling prices? The cause is a perfect storm of multiple forces, including lower gas prices and reduced production and transportation costs. Eggs and livestock production have surged from shortage to surplus. A strong U.S. dollar has cut overseas demand for American goods while also making imported goods more affordable.
Driving food prices even lower are nontraditional rivals, such as Amazon and Walmart, which are using lower-cost groceries to gain or rebuild market share amid a turbulent retail landscape.

“There certainly doesn’t seem to be one thing causing prices to decline; there’s several factors at work,” said Steve Reed, an economist with the Consumer Price Index program at the Bureau of Labor Statistics.

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