Banner Year Ahead For Store Brands?
With countries around the world facing double-digit inflation on basic food items, I think many of us wonder: Can the United States be far behind?
The simple answer is no. The USDA is forecasting overall food prices to go up between 3 and 4 percent in 2011, largely due to the rising cost of commodities and lower supplies of basic ingredients. Demand for corn is at the highest levels in recent memory: Supplies of the U.S. crop are at 15-year low, thanks to increasing demand from the U.S. ethanol industry.
So what does that mean for store brands? To get a better sense of how price increases could affect the average American household — and the potential opportunity for store brands — it makes sense to look at overall food spending and how it compares to other countries.
According to the USDA, Americans spent more than $607 billion on food consumed at home in 2009, and another $575 billion on food consumed away from home. For most of the decade, food eaten outside the home made steady gains, and by 2008, in-home and out-of-home food consumption essentially was on par. But the recession changed all that: As consumers sought ways to save money, they dined out less frequently to reduce household expenses.
However, food remains less costly, in terms of percentage of income, in the United States than in almost any other nation. On average, food accounts for just 6.9 percent of household expenses in America, compared to more than 11 percent in Austria, 15 percent in South Korea, 42 percent in Ukraine and 45 percent in Pakistan.
Inflationary Impact
With that in mind, how might inflation affect the average American family? If the USDA's forecast holds true, inflation of 3 to 4 percent would add $267 to $356 to that family's food bill per year. If inflation goes a bit higher than expected, say 5 or 6 percent, food would cost the average household another $445 to $534 each year — not an insignificant amount.
But the real story is more complex. Consider the reduction in the social security tax rate for 2011: It equates to an additional $ 1,000 in the average American's wallet, enough to cover increased food costs and then some. And we should expect increased demand for products and services as unemployment subsides throughout this year and consumer confidence builds.
With the cost of basic commodities such as meat, wheat, milk and eggs rising by high single or low double digits, consumer packaged goods manufacturers will need to raise prices. I think most retailers will simply pass those costs on to consumers — a move that may prompt more households to shift to less-expensive store brands, which as we well know, have already enjoyed solid growth over the past three years. A smaller percentage of retailers will resist price increases and look to turn lower prices into a competitive advantage.
What might be the wild card, however, are climbing U.S. gas prices. What will be the consumer impact on monthly household expenditures?
In 2010, there were 2.1 cars per household. Assuming that each car is driven 1,000 miles per month and gets 20 miles per gallon, a price increase of 10 cents per gallon (no matter what the grade) translates to an increase of just $10.50 per month. But if prices increase further, we could see households paying much more: $52.50 with a 50-cent increase; $105 with a $1 rise and $210 with a $2 increase.
In 2008, the combination of rising commodity and gas prices led to about a 2 percentage point gain in store brand unit share. With increased retailer focus on store brands and consumers likely looking to offset rising gas prices by reducing other household expenditures, look for 2011 to be another banner year for store brands.
Straight Talk delivers monthly store brand insights from The Nielsen Co., New York. Todd Hale is Nielsen's senior vice president, consumer & shopper insights.
'With the cost of basic commodities such as meat, wheat, milk and eggs rising by high single or low double digits, consumer packaged goods manufacturers will need to raise prices.'