The price of a boneless chicken breast, often the choice at many a dinner table, illustrates why the battle among grocers for consumer dollars promises to heat up.
Conventional grocery chains are promoting boneless chicken breasts, a bellwether of pricing in the sector, for $2.99 a pound, compared with the regular cost of $7.99. Discounters such as No Frills and Food Basics, meanwhile, sold turkeys for as little as 97 cents a pound at Thanksgiving, compared with the regular price of $1.79.
Price competition has been relatively tame this year, but Loblaw Cos. Ltd. president Allan Leighton signalled yesterday that he's determined to bolster sales volumes at virtually any cost, even if it means tighter margins.
"I think that this Christmas period will be pretty fierce in terms of competition," he told analysts. "Inflation, or lack of it, will be a factor for at least the next six months, restricting revenue growth and therefore volume is the new imperative. With that in mind we have invested in price [reductions]in the quarter at a cost to gross margin."
Today, industry observers will get a clearer picture of inflation when Statistics Canada releases the October consumer price index. But grocers, after benefiting over the past year or so from increased food prices, are already feeling the squeeze of a turning tide.
For the first time in two years, food inflation slipped 0.2 per cent in August from a month earlier, and again in September from the previous month, according to Statscan. On a year-to-year basis, food inflation rose just 2.7 per cent in September from a year earlier, after gaining 4.4 per cent in August.
As food inflation recedes, grocers have to sell more items to generate as many sales dollars as previously.
"If Loblaw chooses to fight with prices, and Loblaw is the big dog, everyone is going to have to follow," says Kevin Grier, analyst at the George Morris Centre, a Guelph, Ont.-based agriculture and food economics researcher.
The rate of food inflation has been gradually easing in 2009 and will probably disappear by year end, said Millan Mulraine, economics strategist at TD Securities. The changes are a result of lower import prices and a stronger dollar, he said.
Loblaw is already feeling the pinch. Inflation among the products it sells fell by 3.5 per cent in the quarter to below the national food price inflation rate of 4.2 per cent, as measured by CPI. The grocer felt the pain in lower sales: its same-store sales at outlets open a year or more - a key retail measure - declined 0.6 per cent in the third quarter.
Even so, the grocer beat analysts' profit targets from improved cost efficiencies in buying and transportation, including lower fuel expenses. But now it expects that margins and sales will be "challenged" because of declining inflation, competitive intensity and the company's renovations and supply chain investments.
Other chains are moving aggressively too. Discount giant Wal-Mart Canada Corp. provides "price leadership" in the market, spokeswoman Susan Schutta said. "We think much of the pricing promotion in the marketplace has been a direct reaction to Wal-Mart's price leadership."
Metro Inc., which reports its quarterly results today, has also been reining in prices. The Quebec-based chain sells boneless chicken breasts for $2.99 at its conventional stores, and $2.77 at its Food Basics discounter.
LOBLAW COS. LTD. (L-T)
Close: $31.90, up $1.50
Loblaw Cos. Ltd.
Q3 / 2009 / 2008
Profit / $189-million / $157-million
EPS / 69 cents / 57 cents
Revenue / $9.47-billion / $9.49-billion
Source: Company reports