Summary
As commodity prices increase, food manufacturers will be required to pass on higher raw material costs to their consumers.Over time these higher prices will put pressure on premium priced branded products and shift share to private label and value brands.Will this same pressure apply to retailers and hurt overall category sales ? Which retailers will benefit the most? Which retailers will be hurt on sales volume ?
Analysis
Food retailers will not be as impacted by rising food costs in the same way that food manufacturers will be hurt by rising commodity costs.In the short term it will actually benefit most retailers as the total basket ring on shopping trips will increase.Retailers make money based on margin so rising food costs are a good thing for them in the short term.
However, there are still many challenges that retailers will face.Consumers will tend to trade down to private label products and more value priced items.They will also tend to buy less higher margin impulse items.Consumers will also plan their shopping trips more diligently cutting down on frequency of trips in favor of large stock up purchases.
These behaviors to rationalize their food shopping will benefit key discount retailers like Walmart,Costco,Target and other large discount food centers.It will likely hurt the neighborhood grocers like Kroger,Safeway & Super Valu.High end organic/natural retailers like Whole Foods will also suffer as consumers pare back their purchase of premium organic and natural foods.
While this behavior and shift is probably only temporary it will amount to some changes to sales targets for select food retailers in the first half of 2008.Longer term I expect commodity prices to stabilize at only slightly above average inflation levels and retailers results will revert back to how well they execute and provide consumers with a pleasant shopping experience with good value prices.
