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Aug 11, 2010, 12.35 PM IST | Source: Reuters

Wal-Mart grocery prices may portend inflation

Wal-Mart Stores backed away from steep grocery discounts in July, signaling that consumers' reprieve from food inflation since the recession may soon end.

Wal-Mart grocery prices may portend inflation

Wal-Mart Stores backed away from steep grocery discounts in July, signaling that consumers' reprieve from food inflation since the recession may soon end.

In the United States, Wal-Mart sells more groceries than any other retailer. A move away from discounts to drive sales would help other supermarkets -- such as Kroger, Supervalu and Safeway -- raise prices as costs for staples like beef, dairy and fresh produce increase.

Grocery prices at Wal-Mart rose 5.8% in July from June, according to a J.P. Morgan study of 31 items at U.S. Wal-Mart supercenters and at several grocery competitors. The study was conducted at stores in Northern Virginia.

The study also showed that while Wal-Mart still had the lowest prices, that gap had shrunk to 10.4% on average versus 16% in June.

The world's largest retailer may yet decide to announce another round of rollbacks in the fall, though several analysts see July as a shift away from the deeply discounted "rollbacks" introduced earlier this year and back to a strategy of offering everyday low prices.

Its pricing last month also plays into a wider economic debate about whether high unemployment will prod the United States into a deflationary environment, or whether rising material and labour costs will force retailers to push prices higher.

"My sense in talking to management is that they realized the rollback strategy has not worked to their liking, they didn't get the traffic that they expected," J.P. Morgan analyst Charles Grom said in an interview.


DOLLAR STORE RISK

Wal-Mart, which has seen sales decline at U.S. discount stores open at least a year for the past four quarters, cut prices on thousands of items in the spring to lure back customers who shifted to dollar stores for even lower prices.

A Wal-Mart spokesman declined to comment on the J.P. Morgan report. Wal-Mart's "rollbacks" typically last about 90 days, so the ones announced in the spring were due to end.

Still, Wal-Mart is making major changes in its U.S. discount business, including replacing Eduardo-Castro Wright as head of its U.S. discount stores division with Bill Simon, and bringing back hundreds of items that had been eliminated from store shelves as the company tried to pare back merchandise.

Ratcheting down rollbacks could be another part of trying to right the U.S. ship, analysts said.

According to the J.P. Morgan report, items with higher prices included a 36-ounce bottle of Windex glass cleaner at USD 2.97, up from USD 1.97 and a 12-ounce box of Quaker Oats, up 66% to USD 3.66, Grom said.

If Wal-Mart eases up, even a little, on discounts, that could be a relief to grocers like Safeway and Supervalu that have been vulnerable to discounting by competitors.

"Most people key in on Wal-Mart pricing, so I think that you can see generally that (retailers) will gravitate (to higher prices) if Wal-Mart is doing that" said Ken Harris, chief executive of consultancy Kantar Retail Americas, which works with Wal-Mart and other retailers and manufacturers.

"The manufacturers will applaud it," Harris said of Wal-Mart raising prices. "The retailers want it, too."

Rising prices for commodities like wheat and hogs and news coverage talking about rising commodity costs could also give retailers and manufacturers the cover to raise.

"Any time a retailer or a manufacturer can use conventional wisdom to support an increase, they do and they should," Harris said.

Traditional grocers believe that pricing has stabilized compared with a year ago when most supermarkets were cutting prices, said Morningstar analyst Michele Chang.

"Now it's sort of a steady state. It's not getting materially better, but not getting worse," Chang said.

Since grocers operate at extremely thin profit margins, even slightly higher prices will help.

Kantar's Harris said inflation would only be modest as unemployment remains high and consumer confidence is low.

"The economy is still fragile," he said.

Wal-Mart shares were up 3 cents at USD 52.32 on Tuesday on the New York Stock Exchange. Kroger shares were up 21 cents at USD 22.40, Supervalu shares were up 21 cents at USD 11.94 and Safeway shares were up 13 cents at USD 21.86.

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