The food fight in the grocery sector is expected to remain fierce in 2014, as low inflation keeps a firm lid on prices.
A University of Guelph report to be released Tuesday predicts food prices will rise between 0.3 per cent and 2.6 per cent in 2014. The low level of inflation, or even deflation in some cases, may be a boon to consumers, but it leaves retailers struggling to boost their sales.
It's a scenario largely un- changed from 2013, when grocers grappled to hold onto price gains. Ultimately, food prices rose below the University of Guelph's prediction of a 1.5-per-cent to 3.5-per-cent pickup, marking the first time in four years that it faltered in its food-pricing forecast.
"There's a war out there – it's affecting everyone," Sylvain Charlebois, co-author of the report and associate dean at the University of Guelph's college of management and economics, said in an interview.
Grocers are feeling the effects of price skirmishes and a penny-pinching consumer, forcing retailers to steal business from one another or suffer declining sales. The enemy is largely major U.S. players, especially discounter Wal-Mart Canada Corp., which is expanding its food aisles, and rival Target Corp., which introduced food offerings in its 124 new stores in 2013, raising the stakes in a sluggish segment.
Near-deflationary effects have been present across global economies, affecting food markets in developed countries, partly because of excess capacity in North American and European food industries, the report says. "As a result, companies were not in a position to raise prices, and neither were consumers in a position to spend more."
Grocers are feeling the heat. "The outlook is still very competitive," Eric La Fleche, chief executive officer of Metro Inc., told analysts last month. "People are chasing sales at considerable expense. And we have to be careful between chasing those sales, spending too much money and not getting any returns."
In its most recent fiscal quarter, Metro was forced to reduce regular prices on key staple items, he said. As a result, the company food prices slipped about 0.5 per cent while traffic to its stores also declined, he said.
Now, the grocer is beefing up its discounter Food Basics chain and starting to offer an in-stock guarantee: if it runs out of an item promoted in its flyer, the retailer will give shoppers a rain check and a 10-per-cent discount.
Loblaw Cos. Ltd., the country's largest grocer, saw its prices slip about 0.3 per cent in its latest quarter, its president Vicente Trius said last month.
At the time, Metro was starting to see some signs that inflation was returning in its meat, fruit and vegetable prices, Mr. La Fleche said. So far this year, the largest food price increases occurred in fish and vegetables, at 4.1 per cent and 5.2 per cent, respectively, according to Statistics Canada. But over all, "there was downward pressure on retail food prices," Prof. Charlebois said.
Traditional food retailers are feeling pressure from a host of unconventional players, including e-commerce purveyors Amazon.ca, which recently rolled out non-refrigerated food offerings, and Ontario-based Grocery Gateway, his report says. At the same time, Shoppers Drug Mart Corp. is bolstering its food aisles and likely will continue to do so after Loblaw closes its $12.4-billion deal to buy Shoppers.
"Global inflation is expected to be relatively low worldwide, reflecting both output gaps and high unemployment," the report says. "North America in particular has seen subdued inflation due to soft demand and contained energy prices."
Prof. Charlebois said he predicted that the launch of new stores would moderate price increases in 2013. But "we underestimated the impact of the competition in the market."
He said Metro has the most to lose as its two major rivals, Loblaw and Sobeys Inc., the second-largest grocer, which is owned by Empire Co. Ltd., bulk up in big mergers, aimed partly at shaving costs to improve the bottom line. Sobeys swallowed Safeway Canada last month for $5.8-billion.
"It was a very bad year for Metro and 2014 is likely to be another challenging year," he said.