Get Ready For Higher Food Costs

Laura Heller

Contributor

Food prices are on the rise and at least one grocer is planning to pass those costs on to consumers.

The cost of produce, meat and pharmacy items is going up and Safeway SWY -0.18% isn’t going to absorb the increase, but will instead, raise prices in stores.

“While sales met plan in the first quarter, income was slightly below plan, in part as a result of inflation in produce, meat and pharmacy that was not fully passed along for competitive reasons. we expect to pass along most of the inflation we are experiencing,” said Safeway President and CEO, Robert Edwards.

The Consumer Price Index (CPI) for food-at-home (grocery store food items) was up 0.4 percent in March and is up 1.4 percent from last March, according to the U.S. Department of Agriculture.

The USDA expects the food, food-at-home and food-away-from-home CPIs to increase 2.5 to 3.5 percent over 2013 levels. And this is based on the assumption of normal weather conditions and normal weather has hardly been the norm.

This forecast is based on an assumption of normal weather conditions; however, severe weather events could potentially drive up food prices beyond the current forecasts. There’s an ongoing drought in California that could effect fruit, vegetable, dairy and egg prices, and the drought in Texas could drive beef prices up even further, according to the USDA.

English: The Deli area of a Harris Teeter store in Apex, NC. (Photo credit: Wikipedia)

Safeway’s plans to pass on higher prices aren’t solely based on inflation — the company is in the process of merging with Albertson’s in a $9 billion deal expected to close by the end of this year. Controlling costs and maintaining an even balance sheet is pretty imperative.

But Safeway has more than 1,300 stores and $36 billion in sales, the choice not to absorb higher food costs (as some retailers will) can either spur others to raise theirs in much the same way airlines raise ticket prices or fees when a competitor does, or do the opposite. Competitors may take the opportunity to hold the line on rising prices in a rare competitive advantage.

Harris HRS +1.57% Teeter stores have actually cut prices on 1,000′s of items, citing improved efficiencies now that the regional chain is part of Kroger KR +0.24%. It’s both an operational and media savvy move.  But Safeway shoppers won’t have the same benefit.

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