Your grocery store, on the other hand, is overjoyed at the prospect of higher meat and vegetable prices.
Grocery stores are also affected by rising prices for staples such as milk and pork, as they must pay more to their suppliers. But, while they’re raising prices to cover rising supplier costs, they’re also adding a little something extra on top of that.
When the cost of groceries rises, stores will “mark up the full rate of inflation plus a little bit more,” according to Burt Flickinger, managing director of retail consultancy Strategic Resource Group. For example, if a store’s suppliers raise the price of meat by 6 cents per pound, the store may raise the price it charges for the same meat by 10 cents.
Stores are betting that most customers will not object to price increases because, after all, they need groceries and will still consider shopping to be a better deal than eating out at restaurants. According to Labor Department data, restaurant prices are rising faster than grocery store prices, giving grocers more leeway to charge you more.
And once the stores feel comfortable raising prices a little, will you notice if the gallon of milk you’re buying has gone up to $3.85 instead of the $3.76 the store could charge if it wanted to maintain its margins? A nine-cent increase on a single gallon of milk may seem insignificant to those who aren’t on a tight budget or don’t want to do the math in the milk aisle, but a store selling a lot of those gallons will benefit.
According to Flickinger, inflation is the “greatest gift the supermarket sector could receive.” “It’s been years since they’ve had these inflation benefits.”
Prices are rising due to rising demand, supply chain issues, and material shortages as the economy picks up. According to the Labor Department, consumer food prices increased 2.2 percent in May compared to the same month last year. Prices for pork increased by 3.2 percent, fish and seafood prices increased by 1.9 percent, and milk prices increased by 4.6 percent. Fruit and vegetable prices increased by 2.9 percent, with citrus fruits seeing a 9 percent increase.
Leading supermarket chains such as Kroger (KR) and Alberstons have recently stated that rising prices will benefit them. During the early stages of the pandemic, sales at these and other grocers soared, but have slowed in recent months as more people return to eating out.
On a conference call with analysts on Thursday, Kroger CEO Rodney McMullen said, “Our business operates best when inflation is around 3% to 4%.” “A little bit of inflation is always good in our business.”
When inflation is around that level, Kroger can pass costs on to customers, according to McMullen, and “customers don’t overreact to that.”
“Businesses like ours have done well when in periods where the inflation was 3% to 4%,” Albertsons CEO Vivek Sankaran said at an investor conference Tuesday.
Sankaran did not elaborate on why inflation would benefit Albertsons, but he believes that “this inflation will simply be passed through” to customers. Albertsons has yet to respond to a request for additional information.
However, there is a risk that grocery stores will be harmed by excessive inflation.
Customers may skip buying an item if the price rises by more than 4%, according to Joseph Feldman, an analyst at Telsey Advisory Group. If inflation becomes too high, consumers may switch to cheaper brands or buy smaller pack sizes, according to both analysts and grocers.
Customers will be able to afford higher prices, according to Sankaran, because the economy is improving and consumers have more money to spend.
“We’ve never had an environment like this with such a strong consumer where inflation goes higher,” he said. “And inflation will have to go really high for it to start mattering where the consumer starts clamping down on purchases.”
Other retailers have stated that rising inflation will benefit them as well, but for different reasons.
For example, discount toy retailer Five Below (FIVE) anticipates that as prices rise around them, budget-conscious shoppers will increasingly turn to discount stores.
This month, Five Below CEO Joel Anderson said, “As far as inflation goes…I think it’s an advantage for a value retailer like us.”