Some Grocers Hurt, Dollar & Bulk Stores Benefit As Food Costs Soar

The market for arugula and eco-friendly toilet paper may suffer as food prices soar.

The U.S. Department of Agriculture’s Economic Research Service reported that the Consumer Price Index for all foods (both at home and in restaurants) jumped 4 percent between 2006 and 2007, the highest annual increase since 1990. Another 3-4 percent increase is expected this year. These increases will likely be felt at grocery stores that have responded to consumer demand for more exotic and expensive products in the past few years.

Warehouse stores, such as BJ’s Wholesale Club, Costco, and Wal-Mart’s Sam’s Clubs, may all benefit from squeezed wallets - each has posted solid gains in same-store sales in recent months. And because many lower-income consumers cannot afford to spend hundreds of dollars buying in bulk, dollar stores that sell food items are also doing well compared to mainstream supermarkets.

It makes sense that warehouse stores and dollar stores may stand to ride out the economic slowdown relatively smoothly. Good value was the most important factor in determining where consumers grocery-shop, with 60 percent of consumers in the U.S. (and 85 percent globally) ranking “good value for money” as the most important consideration when choosing a grocery store, a recent study by The Nielsen Company (via MarketingCharts).

The most vulnerable sector, reported MediaPost, may be no-frills supermarkets such as Publix. “There’s room at the high end and at the low end, but in the middle, they are just getting squeezed tighter and tighter,” said David J. Livingston, a supermarket consultant in Pewaukee, Wisc.

Some analysts predict that America’s highbrow tastes will help stores ride out the storm. “Many of these retailers appeal to aspirational shoppers - people who aren’t really quite upper-income, but aspire to those tastes,” says Frank Badillo, a senior economist at TNS Retail Forward, a retail consulting firm. But Badillo admits that costs at stores such as Whole Foods (known by many who’ve pushed a cart there as “Whole Paycheck”) may cause some consumers to pull back.