During the pandemic, despite all of the challenges it presented, grocers gained some relief from the margin pressures that had been steadily building. Not only did demand from consumers increase as they ate at home more, but grocers were also able to pass along higher costs created by production and supply chain uptions.
The result was higher operating margins even as grocers spent heavily to keep workers safe and invest in digital technologies.
But this trend may be reversing, according to recent data from the Bureau of Labor Statistics. The producer price index for final demand foods increased by 4.4% in February from the year before, outpacing the 3.6% increase in the consumer price index for food at-home purchases. This marks only the second time since the start of the pandemic that food producer prices have outpaced the increase in prices paid by consumers.
This rise in costs throughout the food and beverage ecosystem shows no sign of slowing down. Producers have had to spend heavily outfitting their facilities to meet safety standards as well as enticing labor to return to work.
In addition, the global shipping container imbalance and shortage of truck drivers in the United States have driven up storage and transportation costs.
Finally, while short-term spikes for input costs can often be offset, especially with more processed foods, the cost of key inputs like oils, sugars and grains remain well above their pre-pandemic levels. The February data suggests that these costs are beginning to be passed along to consumers.
Retailers, which are dealing with their own cost pressures as they have shifted operating models to be safer and more digitally integrated, will need to further adapt.
While strong consumer balance sheets and recently approved stimulus checks should buoy their ability to swallow inflated grocery prices in the near term, lingering unemployment, a change in habits from increased consumer mobility and increased competition from mass retailers stand as headwinds to retailers looking to pass on additional costs to consumers.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
