Squeezed by Rising Food Costs

Source: Business Week article by Pallavi Gogoi

Nearly every food staple has seen double-digit price increases over the past year, some of it due to skyrocketing energy costs

Twice a month, Kathy Nuthall does the math on food vs. gas costs: Shop for groceries near home in Warwick, N.Y., or drive nearly an hour round-trip to a Wal-Mart Supercenter (WMT) in Monroe, a village in the Catskill Mountain foothills. With food prices surging, Wal-Mart has been winning that decision. “I just think that it’s smart. The food is the same, but I’m saving more here,” says Nuthall, who concedes that even with Wal-Mart’s pricing muscle her grocery bill has been creeping higher in recent months.

The cost of food has become a headline story the world over, from food-related riots in Haiti and Egypt to some Asian governments mulling whether to restrict rice exports. In the U.S., grocery bills are surging: Nearly every food staple has seen a double-digit percentage increase over the past year, including a 38% hike for a dozen eggs, to $2.16, and a 19% jump, to $1.78, for a loaf of white bread, according to American Farm Bureau data. With Americans spending 15% of their household income on food and drinks, rising prices in the grocery aisles have spurred consumers to hunt savings. Of that spending, only half goes to grocery stores, with restaurants collecting the rest.

Food is the most visible expenditure on the typical shopping list: After all, most people eat at least three times a day. As prices keep rising, it’s hardly any wonder that Americans seem to be losing their appetite for discretionary purchases (BusinessWeek.com, 4/9/08). “When you buy the same thing week after week it’s easy to see prices marching up, and the two items that people purchase most often are gasoline and food, both of which have seen a runup in prices,” says David Wyss, chief economist of Standard & Poor’s, which, like BusinessWeek, is a unit of The McGraw-Hill Cos. (MHP).

Stores Expanding the Food Aisles

Plus, when it comes to the weekly or biweekly shopping list, people tend to scrutinize more closely how much they spend with a Kroger (KR), Wal-Mart, Safeway (SWY), or Supervalu (SVU) than on casual dining with friends or a quick bite grabbed on the way home from work. On a recent wet, chilly day, Natalie Medina was pushing her 4-year-old son around the store, explaining that she has consolidated her shopping from weekly to every other week in a strategy to save money. Even though the store is farther from her home in Wallkill, N.Y., Medina says the reduced trips save money.

The price tally in the latest American Farm Bureau market basket survey of 16 basic groceries was $45.03 in the first quarter, up 9% from the same period last year. Many of the price increases are eye-popping—a five-pound bag of flour cost $2.69, 26% more than last year. Volunteers in 32 states participated in the survey, with the 76 shoppers paying 23% more for fryer chicken at $1.37 per pound, while the average price for a gallon of whole milk was $3.81, up 10% from last year. Cheddar cheese was 27% higher, to $4.71 per pound, and corn oil rose 9%, to $3.01, for a 32-ounce bottle.

In this environment, some stores are responding by expanding their food aisles. For instance, Family Dollar Stores (FDO), which has 6,500 stores in 44 states, recently boosted its space for food in an additional 2,700 stores; 1,500 stores now accept food stamps. “We have strengthened our everyday assortment of quick prep and ready-to-serve products in all stores, introducing larger family sizes and emphasizing private-label and value brands,” says Howard Levine, CEO of Charlotte-based Family Dollar, where food has been the biggest driver of sales in recent quarters.

Farmers Growing Corn for Ethanol

The surge in food costs has been attributed to several factors, including the increasing number of American farmers who now grow corn to supply the ethanol industry instead of food companies. In turn, they have reduced the amount of land farmed for wheat and soybeans, leading to a huge strain on food processors such as ConAgra Foods (CAG), Kraft Foods (KFT), General Mills (GIS), and Kellogg (K).

Corn prices have soared, hitting $6 a bushel, up 50% from 2007 and triple the price of three years ago. Corn is the main ingredient in livestock and poultry feed, so prices of milk, chicken, and meat are also higher. “It is important to note the contribution of runaway energy prices to the retail cost of food,” says Jim Sartwelle, an economist with the American Farm Bureau. “Transportation, processing, and packaging cost significantly more now than in prior years.” According to a survey by AAA, the average price of regular unleaded gasoline was $3.365, up 20% from last year, with many expecting $4 per gallon in some places this summer.

Supplies Dwindling at Food Pantries

In many parts of the world, extreme food price increases and shortages have led to riots. In America, while the effects of high food prices are felt widely, they are especially hard on the lowest-income consumers. Many food banks around the country are reporting empty shelves even as the ranks of hungry people coming in have risen. The BedStuy Campaign Against Hunger, a nonprofit food pantry in one of the poorest sections of Brooklyn, N.Y., is feeding as many as 6,000 people a month, up 15% from last year, with children comprising half of the visitors.

“I’m sorry to say that the families who came in to pick up food last Tuesday found that we didn’t have any milk, rice, juice or pasta,” says Reverend Melony Samuels, who runs the pantry and is also a pastor at the Full Gospel Tabernacle of Faith church. Samuels says it has become harder for private donors to supply food because costs have gone up. Her group also depends on the federal government, which distributes surplus commodities to thousands of food banks. However, these surpluses have dwindled. Samuels’ pantry now receives only half what it did from Uncle Sam in 2007.

Those who can afford the $45-$50 annual membership fee for a warehouse club are saving their money by buying in bulk at Costco (COST) or BJ’s Wholesale Club (BJ), where sales are humming. On Apr. 10, Costco reported same-store sales growth of 7% in March, while BJ’s sales rose 6%. After reporting a 31% increase in profits in its last quarter, Costco Chief Financial Officer Richard Galanti noted that sales of fresh foods and deli food have helped lift sales overall. Wal-Mart saw a 0.7% increase in March sales, falling short of expectations of a 1% increase. But that didn’t dampen the ebullient mood of Wal-Mart executives who raised the company’s guidance for first-quarter earnings. As prices of food continue to be pressured, retail executives expect the parking lots like the one at the Wal-Mart in Monroe to remain packed.

Gogoi is a contributing writer for BusinessWeek.com.

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