By Ylan Q. Mui and Neil Irwin
Washington Post Staff Writers
Thursday, September 17, 2009
Supermarket prices are plunging as the global downturn drives down the cost of staples such as wheat, corn and milk and grocers fight for the wallets of penny-pinching consumers.
Locally, Safeway stores have slashed prices on thousands of products by as much as 25 percent over the past month. Giant Food said three weeks ago that it has doubled the number of items on sale and papered its shelves with signs highlighting savings. And Wal-Mart, long feared by rivals for its aggressive pricing, plans to open its first area store with a full-service supermarket in Manassas in October.
The heated competition is being fueled in part by the steep decline in commodity prices after a year of dramatic increases, one of the few silver linings of the deep recession that continues to transform the economy.
The price of corn, for example, is down 56 percent since July 2008 on the Chicago Board of Trade. Such drops have helped drive down the grocery consumer price index, which measures what shoppers pay at stores, about 2.5 percent since its peak in November, according to new data released Wednesday by the Bureau of Labor Statistics. While there was an upward blip in energy prices that drove the wider consumer price index up 0.4 percent in August, over the past 12 months overall consumer prices have fallen 1.5 percent.
"The declines have been so broad that even the core-needs kinds of spending have taken hits," said Adam York, an economic analyst with Wachovia. "Consumer budgets are pretty tight right now. You're going to do anything that you can as a retailer to keep consumers in your store."
The renewed focus on price represents a significant shift for the grocery industry, which promoted such amenities as olive bars and in-store sushi restaurants to lure shoppers whose palates had become increasingly discriminating during economic boom times. Supermarkets boasted about the varieties of cheese in stock and expanded their menus of prepared foods. Safeway and Giant remodeled their stores to include faux-wood flooring, soft lighting and farmers-market-style stands. Even the discounter Wal-Mart opened a test store in Texas that priced a bottle of wine above $500.
Then the recession hit, and gourmet grocers that were once emulated struggled to hold on to shoppers. Consumers began clipping coupons and opting for a dozen roses instead of floral bouquets, and 20 percent fat ground beef over 10 percent fat. Traditional supermarkets saw renewed interest in deals on mundane items such as toilet paper and laundry detergent that dominate the centers of their stores. Phil Lempert, a consultant known as "the Supermarket Guru," likened the changes in shoppers to those seen during the Great Depression.
"They learned certain behaviors that they stuck with for the rest of their lives," he said.
The supermarket rivalry is likely to heat up this fall, when Wal-Mart opens its first "supercenter" -- carrying a full line of groceries -- in the region. The behemoth retailer has dominated the grocery business in areas where it has opened supercenters, and food has remained one of its strongest categories during the downturn. Target has also said it is increasing the amount of space it devotes to food in its stores as shoppers shy away from spending money on clothes and home furnishings.
The drop in commodities prices has allowed retailers to lower prices for their customers, but it also can result in lower revenue: If shoppers buy the same food for less money, sales figures will decline.
That's what happened to Safeway, where revenue during the most recent quarter dropped 6.5 percent from a year earlier, even though it is ringing up more transactions. The cost of cheese dropped 17 percent, milk plunged 27 percent, and cherries fell 42 percent.
"The deflation is deeper and more sustained than we had earlier predicted," Safeway chief executive Steven A. Burd told investors, noting that those price declines were the worst in 17 years.
Still, Burd said deflation alone won't make prices hit what he called the "magic price point" that will persuade consumers to buy. So the chain has sacrificed some profit to reduce prices even further, particularly in key markets such as the Washington area. Some of the bigger cuts included $3 declines in the price of large laundry detergent and a large can of Folgers coffee, said Steve Neibergall, president of Safeway's eastern division. Stores are showcasing the new prices with yellow tags, and Neibergall said shoppers have noticed. The average number of items per transaction has risen, he said.
"Ours has always been a very competitive business," Neibergall said. "But it seems like with the onset of the sluggishness of the economy, it has been even more aggressive than it has previously. It feels like it's kind of at an all-time high."
According to a recent survey by the consulting firm Scarborough Research, 55 percent of consumers in the Washington region shopped at Giant in the previous week, compared with 40 percent at Safeway. Costco ranked third, with about 25 percent of shoppers.
In addition, about a quarter of consumers said they bought most of their groceries at Giant, compared with 14 percent at Safeway. Wal-Mart came in third place with 9 percent.
At Giant, the competition is clear on the shelves. New brightly colored tags highlight savings on each item: A 50-ounce jug of Arm & Hammer detergent was reduced $1.50, to $2.99, yesterday. A six-pack of Scott paper towel "mega rolls" that is regularly $8.49 was down to two for $11, the shelf tag blaring the savings of $2.99 each. Other signs pit Giant's price against a competitor's.
Chris Paradissis, regional vice president of sales and operations for Giant Food, said the chain recently doubled the number of discounted items on monthly and weekly cycles.
The company, which is owned by the Dutch conglomerate Royal Ahold, began systematically lowering prices throughout the store three years ago to help halt the long slide in its market share. Those investments seem to have paid off: Sales at established stores have risen the past four quarters, reversing six years of declines, and market share has improved slightly.
"This is not a program. This is the way we go to business every day," Paradissis said. "This is what we are going to do indefinitely."