Deflation taking the air out of retail sales

By Lawrence Aylward/Editor-in-Chief

Consumers are thrilled. But retailers? Not so much.

That was the message delivered from Neil Stern, a senior partner with McMillan Doolittle, a Chicago-based business management consulting firm, regarding deflation, which is putting more money in consumers’ pockets but shrinking retailers’ profits. Stern spoke Tuesday morning at a breakfast during PLMA’s 2016 Private Label Trade Show.

“What retailers are looking at right now is a bit unprecedented,” Stern said. “This has been the longest stretch of food prices going down in about 50 years. Obviously, it also has an impact on [the private label] industry in terms of processing ingredients in manufacturing. In the short term, as we look at 2017, there is not a lot of potential relief in site.”

The fourth quarter could be the worst quarter ever for supermarket retailers, Stern noted. Even Cincinnati-based The Kroger Co., which has experienced 12 consecutive years of same-store growth, could see that amazing run end.

“The streak for Kroger could be over if deflation continues,” Stern said.

What does continued deflation mean for retail?

“It means you have to sell a lot more units just to stay steady,” Stern said. “Because of intense competition in the marketplace, [retailers] are not able to pass those prices onto consumers.”

There are other challenges. Food service is a major disruptor for retailers. For 30 years, McMillan Doolittle has tracked data on how consumers spend dollars in the share-of-stomach category.

“Back in the day, supermarkets and food retail had 70 percent share of stomach,” Stern said. “Restaurants had 30 percent. In April 2015, it was the first time in history that those two bars converged and foodservice was larger than food retail.”

Retailers will need to stay with and ahead of the trends to remain competitive, Stern stated.