Why Do Food Prices Keep Going Up?

by John F.T. Scott

I’m often asked about the underlying reasons for the rapid increase in food prices, especially over the past year. There is a relatively easy answer – input costs have risen dramatically at every level of the food chain. Primary producers have experienced substantial cost increases in fuel, fertilizer, and labour. Similarly, food processors have been confronted with increased costs in basic raw material, energy, labour and distribution. All of these costs cascade up to the retailer who is experiencing cost increases of a similar nature and now must pass most of the price changes to the consumer. Since the retailer is the last point of contact and the most visible part of the chain, any upward pricing trend incurs the wrath of the consumer, media and even government. The level of concern by the public, fueled by a voracious media, have even led retail food company executives to be called before parliamentary committees to explain what are increasingly considered to be “greedy” practices. A parade of retail experts have opined on innumerable radio and television broadcasts while publicly-traded retailers have been repeatedly eviscerated in the media each time an earnings report is released.

Yet despite all of this uncomfortable attention, prices continue to rise. Why?

First, let me back up to provide a bit of context to the issue. We have a very concentrated food retail sector in Canada. Five companies control approximately 83% of all food distributed through a variety of formats which can include corporate retail stores, franchises, and wholesale operations. The company store formats are often a combination of traditional supermarkets, specialty operations and discount stores. Each company also offers the consumer a discount and a premium store brand product which are sold only through their proprietary distribution channels. Consumers shop in different stores for different reasons and the pricing structure reflects that reality. Every retailer is extremely conscious of the absolute need for two essential realities: food safety and competitive pricing. Retailers must always be on the side of the consumer and retailers who indiscriminately raise prices run the risk of breaking this critical trusting relationship. In short, no one wants to raise prices one penny!

Consequently, suppliers selling goods to each retailer understand that price increases will not be accepted by the retailer if the change will affect the competitive balance in the marketplace. The supplier must provide an extremely strong case as to why the retailer should accept the requested increase. If that is achieved, it is then up to the retailer to determine the formula through which products are offered to the consumer in each store format. For example, the discount formats operate with lower markups on packaged goods than traditional stores. Some offer innovative pricing based on a limited assortment while others provide rock-bottom pricing with no service and a lower-grade “fresh” assortment. Traditional stores concentrate on a mix of margins among all departments and concentrate on quality fresh departments while limiting offerings in packaged goods to premium and value private label and the top two national brands. Regardless of the format or pricing formula, the retailer must ensure that their stores are always competitive.

The increased pricing that consumers are now experiencing in the stores is partly because there is a lag between the time the retailer agrees to purchasing the goods and when these products are actually on the shelves. It’s considered a contract between retailer and supplier and often takes place months in advance. For example, most festive season products including private label, are purchased 6 months prior to the season. That’s why most retailers are able to declare a moratorium on price increases on certain products for the length of a feature season. In these cases, the retailer has certainty of the cost of the product and can underscore that reality by featuring it only on private-label products.

These product acquisition contracts, combined with the fact that input costs continued to increase in the fall, suggest that the consumer can expect to see more pricing increases in the months ahead. Add to that the news of the price adjustment recently announced in the supply-managed dairy sector and Canadians will certainly see upward pressure in the products that use dairy ingredients through 2023.

But there is hope. Last fall, we began to witness a modest abatement in the requested price increases on several products. This implies that the rapid inflationary trends experienced in 2022 should start to lessen. There is no question that there will continue to be upward pressure, but increases should be at a declining rate. In addition, given its intensely competitive nature, the food retail sector will deploy measures at every turn to mitigate and perhaps even reverse this unacceptable trend. Remember: the retailer must always be on the side of the consumer and that includes comfort in the cost of food acquisition.