Practical Dad

PracticalDad Price Index - February 2016:  Bare-Knuckle Price Fighting…

The pricing for the February 2016 edition of the PracticalDad Price Index is in with deflation in the 47 item grocery market-basket continuing.  As I sat there researching background information to understand something, it occurred that what we're watching in the retail economy is best described as bare knuckled price fighting.  There was a time when grocery stores were adding upscale coffee kiosks and organic produce sections to entice customers, but that's now in the past as stores are finding new ways to fight for the disappearing consumer dollar and it's creating a feedback loop for deflation.  But first, the numbers from this most recent monthly pricing and then some comments both about what I'm seeing on the shelves and how this is impacting the Index.

The Total Index reading on the 47 item PracticalDad Price Index for February 2016 came in at 103.86 (November 2010 = 100), down from January's 104.54.  The 37 food-stuff components sub-index for February was 104.27 (November 2010 = 100), likewise down almost a full basis point from January's result of 105.25.  For the Food-only Subindex, this most recent result of 104.27 is fully 70% less than the high-point of that sub-index; it reached a maximum of 115.13 in December 2014 and has declined since that time. 

So there you have it.  More than a half decade of artificially low rates pushing the zero-rate boundary to spur inflation and all of those trillions of dollars of additional liquidity wiped away in the fourteen months since that peak.  Fourteen months and the aggregate pricing is now back at a level unseen since the summer of 2011.  A pound of hamburger and a package of hot dogs are still more expensive than at the outset of the survey in November 2010, as are some other food items, but it's what has occurred with other items that provide a good explanation of deflation and what's occurring within the greater economy.

What's accounting for the ongoing deflation?  Simply put, the grocers are doing everything that they can to fight for the average family's disappearing dollar - understand that one in seven Americans is now receiving government food assistance - and this consists principally of rolling out new products that cost less to produce, the lowest common denominator approach.  I've noticed this within the past year as two of the three surveyed grocers - each part of a separate grocery chain - established new pricing policies that moved towards low prices on store-brand products.  The third grocer is an independent whose store-brand within the past year has been completely replaced by another supplier with an across-the-board reduction in the price of each item surveyed.  But what has happened within the past several months is that one of the grocery chains is now in the process of supplementing its store-brand product line with another line of products that are offered by a grocery industry GPO (Group Purchasing Organization).  The savings on the products are significant; in the case of a can of vegetables, by a full 40% (from $.79/can to $.47/can) and this is being played out among other products within the basket.  It's also led to a mental debate on whether and how to account for this shifting in the PracticalDad Index.

When the concept for the Index arose in 2010, the pricing was based whenever possible upon the lowest prices for the items and these were, in all instances, the store-brand (generic) lines of products.  Name-brand items were only used when the lower-cost store-brands weren't available in all of the stores.  These lower priced alternatives to the store-brands simply didn't exist in the products and it's only within the past few months that this has fed into multiple products.  Should I account for them or not?  Given that the baseline premise for the survey was a marketbasket of grocery items being purchased by a family with children living within an alloted monthly food budget, I opted to account for the product shift as these items would be purchased by the budget-conscious family in lieu of the now more-expensive store-brand items.  These products aren't going away and the question that I have, based upon what I've seen in one of the chain's stores, is whether it will actually be the store-brand items going away instead.

I mentioned the term GPO in a previous paragraph and it's useful to explain what that is.  A Group Purchasing Organization is actually an old concept now brought to the grocery industry.  The first GPO was started in 1910 by the New York Bureau of Hospitals and centralized purchasing of medical items for a number of hospitals in order to maximize buying power and gain price concessions from manufacturers.  This has long since caught on amongst other industries and holds true for the grocery industry as well.  What the Index now reflects is that one of the surveyed grocers now offers the low-end brand created and marketed by a GPO named Topco Associates, LLC.  This GPO is a privately held concern consisting of more than 50 separate grocery retail chains across the country with aggregate revenues in the billions of dollars and the organization uses this buying heft akin to that used by Walmart to gain concessions from food producers.  As I researched the concept of GPO for this article, I came across an online ad touting Do you want to be like Walmart?  The Walmartization of the American economy continues and I wonder where it will end.  As I write this, to my left is an orange can of low-cost coffee now offered by the other grocery chain as a supplemental choice to it's own store-brand coffee and I surmise that it's from yet another GPO (as yet to be determined).  And as you'd expect, it's not good.

And now for the past six months of results.

 

PracticalDad Price Index - February 2016
Month Total Index Food-Only Index Spread
2/16 103.86 104.27 .41
1/16 104.54 105.25 .71
12/15 104.92 106.39 1.47
11/15 104.79 105.97 1.18
10/15 106.17 107.07 .9
9/15 105.21 107.12 1.91

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