July 18, 2012
FD Buyer: Margins Heading Up or Down?
Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Dairy Buyer magazine.
Most retailers expect decreases in frozen/dairy margins of between one percent and three percent in the next 12 months. Perhaps not so surprisingly, most manufacturers see the reverse.
That’s at least according to an informal polling conducted by FD Buyer, including beaucoup hours spent on the phone and blasting out e-mail surveys to retailers and manufacturers, to get a feel for what we might expect in the year ahead.
It’s important to keep in mind that our average margin erosion of 1.4 percent expected by stores includes the 40 percent of respondents who expect no change in margins.
One major retailer, who expects a two percent decrease, says that deflation in some categories early this year allowed margin enhancement, but he’s not optimistic about the rest of the year. "We’re starting to see more cost increases, and when that happens, we tend to get margins compressed, since we can’t pass on increases as quickly as we get them."
Another, who foresees a three percent drop in frozen food margins at his chain, cites "extreme competitive activity" in his market as Walmart and Kroger duke it out on price. Others single out Winco and Aldi as taking aggressive stances that cut into margins.
Chains with a big enough budget to implement price optimization programs see some light at the end of the tunnel, but as one points out, "It’s not a pretty picture. Highly price-sensitive items are dropping down, and of course that’s where the volume is. We can’t get it all back, and so we just have to accept that you can’t make grosses in frozen that you are used to seeing."
Manufacturers surveyed expect retailers’ margins in frozen/dairy foods to increase by 2.5 percent in the year ahead. Personally, I attribute this to "the grass is always greener" on the other side of the fence syndrome. Many retailers and vendors I speak with believe that their "partners" are gin-swilling cheats getting rich at their expense.
I reached out to the typically-optimistic Dan Raftery, president of Raftery Resource Network, to get his take. Unfortunately, he sided with the retailers.
"I expect margins to go down, and not just in frozen and dairy foods," he opined. "Manufacturers have been holding their prices back for some time now with package changes, reduced weight, changed formulas and so on, and they have no choice but to raise prices as food inflation hits everyone across the board. It’s just a matter of time."
BrainTrust
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Discussion Questions
Discussion Questions: Do you expect to see grocery price/margin pressure to increase or decrease in the next twelve months? What can retailers do to bolster margins while remaining price competitive?
Poll
I agree with Dan Raftery that margins will likely go down. Given that the current drought in the Midwest is likely to reduce supply and exacerbate food inflation along with projected fuel increases and higher health care costs for manufacturers, all indications are that food inflation is coming. Unfortunately for retailers, the continued tough economy will make it difficult to raise prices to maintain margins without losing customer share.
Margins pressures will increase during the next 12 months … and they will be further affected by the current drought conditions in the prime agriculatural areas and governmental processes.
Food retailers, unless they can come up with new consumer-drawing magnets, which is unlikely, are between the rock and the hard place.
Agree with other comments … as I sit in another dry 100 degree day in the Midwest!
Sorry not very “BrainTrust.”
However, an important issue that is probably not getting enough focus and will likely lead to the consumer price changes having disproportionate impact on consumers who are least able to afford them.
This is a no brainer. With weather driving up the cost of products and both manufacturers and retailers wooing cash strapped consumers, there is no doubt margins will contract. It is true that much of the cost associated with frozen and dairy is associated with packaging and the perishable nature of the products, but if the effects from the current drought are as severe as they seem, everyone is going to be impacted.
Probably the bigger question in all this is “How will the relative margins be impacted?” If frozen and dairy still maintain their relative price with fresh and dry grocery, the consumer may still see them as a smart purchase. The challenge is that I don’t know how diligent consumers are at making cross department comparisons. It is more likely consumers are simply going to realize that the same frozen or dairy product is more expensive.
Although price optimization programs are the holy grail, retailers can do a lot to appear competitive by simply meeting all competition on the top 10 movers in each category. Combining this with an understanding of seasonal trends by offering timely discounts can keep a retailer in the running while not giving away the store.
Seems to me the large variable not covered here is the cost of the fuel necessary to process, package, transport and then keep these products cool or frozen. Supply and demand of the product itself will have an impact on pricing and margin, but fuel is likely to have just as much impact.
My prediction — margins will have downward pressure, based on both supply and fuel costs. The impact to retailers in this case will as usual be less to those who have prepared for the contingency early, tightened up their supply chain — including partnerships — and driven for efficient execution.
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I agree with Dan Raftery that margins will likely go down. Given that the current drought in the Midwest is likely to reduce supply and exacerbate food inflation along with projected fuel increases and higher health care costs for manufacturers, all indications are that food inflation is coming. Unfortunately for retailers, the continued tough economy will make it difficult to raise prices to maintain margins without losing customer share.
Margins pressures will increase during the next 12 months … and they will be further affected by the current drought conditions in the prime agriculatural areas and governmental processes.
Food retailers, unless they can come up with new consumer-drawing magnets, which is unlikely, are between the rock and the hard place.
Agree with other comments … as I sit in another dry 100 degree day in the Midwest!
Sorry not very “BrainTrust.”
However, an important issue that is probably not getting enough focus and will likely lead to the consumer price changes having disproportionate impact on consumers who are least able to afford them.
This is a no brainer. With weather driving up the cost of products and both manufacturers and retailers wooing cash strapped consumers, there is no doubt margins will contract. It is true that much of the cost associated with frozen and dairy is associated with packaging and the perishable nature of the products, but if the effects from the current drought are as severe as they seem, everyone is going to be impacted.
Probably the bigger question in all this is “How will the relative margins be impacted?” If frozen and dairy still maintain their relative price with fresh and dry grocery, the consumer may still see them as a smart purchase. The challenge is that I don’t know how diligent consumers are at making cross department comparisons. It is more likely consumers are simply going to realize that the same frozen or dairy product is more expensive.
Although price optimization programs are the holy grail, retailers can do a lot to appear competitive by simply meeting all competition on the top 10 movers in each category. Combining this with an understanding of seasonal trends by offering timely discounts can keep a retailer in the running while not giving away the store.
Seems to me the large variable not covered here is the cost of the fuel necessary to process, package, transport and then keep these products cool or frozen. Supply and demand of the product itself will have an impact on pricing and margin, but fuel is likely to have just as much impact.
My prediction — margins will have downward pressure, based on both supply and fuel costs. The impact to retailers in this case will as usual be less to those who have prepared for the contingency early, tightened up their supply chain — including partnerships — and driven for efficient execution.