Rise and shine, food enthusiasts! Brace yourselves as we pull back the curtain on the intriguing world of food prices with Ricky Volpe, the food economist and professor, who's here to share his wisdom. Discover why your grocery bills are skyrocketing and why food prices are not dropping. Hear Volpe's predictions of a slow but steady recovery in prices, and learn about the influence of climate change and global conflicts on food costs. This episode promises to unravel the enigma of food price formation, a must-listen for anyone looking to understand this complex issue.
The show continues to simmer as we stir up discussions about the tough tussle between retailers and CPG companies amidst rising food costs. How are retailers demanding transparency and justification for price increases? Why are more retailers investing in vertical integration and store brands? How have consumers changed their shopping habits during the pandemic? Ponder over the role of marketing in maintaining brand recognition and defying the stigma associated with store brands. This episode is a veritable feast of insights into the food industry, leaving you hungry for more. Tune in to explore the changing perceptions around store brands and to understand the crucial need for transparency in our food supply chain.
Rise and shine, food enthusiasts! Brace yourselves as we pull back the curtain on the intriguing world of food prices with Ricky Volpe, the food economist and professor, who's here to share his wisdom. Discover why your grocery bills are skyrocketing and why food prices are not dropping. Hear Volpe's predictions of a slow but steady recovery in prices, and learn about the influence of climate change and global conflicts on food costs. This episode promises to unravel the enigma of food price formation, a must-listen for anyone looking to understand this complex issue.
The show continues to simmer as we stir up discussions about the tough tussle between retailers and CPG companies amidst rising food costs. How are retailers demanding transparency and justification for price increases? Why are more retailers investing in vertical integration and store brands? How have consumers changed their shopping habits during the pandemic? Ponder over the role of marketing in maintaining brand recognition and defying the stigma associated with store brands. This episode is a veritable feast of insights into the food industry, leaving you hungry for more. Tune in to explore the changing perceptions around store brands and to understand the crucial need for transparency in our food supply chain.
Welcome to Lost in the Supermarket. The top of mind for consumers and the top of the headlines over the past couple years has been the price of food. As we enter 2024, we're going to explore where we are, what's brought us here and what the future holds for the industry and for our shoppers. Ricky Volpe received his PhD in agriculture resource economics from UC Davis back in 2010. He then spent four years working as an economist at the USDA Economic Research Service in Washington DC, researching food price information, competitiveness in the food industry and the healthiness of our grocery purchases. Here in the US, Ricky was responsible for forecasting retail food price inflation at the national level, and now he's at Cal Poly. He teaches courses on food retail and supply chain management, transportation and logistics and data analysis, and he maintains an active research agenda using a variety of large data sets to study those issues that are related to market structure, firm performance, food prices, consumers choices and health outcomes. Ricky works closely with industry leaders in food retailing, wholesaling and distribution in order to facilitate the collaboration on public-private partnerships, student internships and scholarships. He's also a key voice for for FMI in sharing his observations and insights into our food world.
Phil:Ricky, welcome to Lost in the supermarket. Thanks for having me. So, as we enter in just a couple of weeks from now 2024, what's your outlook? What are we going to be looking at? You know, the headlines continue. Food prices up. We just saw a report over the past couple of days that it looks like egg prices are going to go back up because of yet another strain of bird flu. So give us the you know 101. What are we looking at for 2024 as it relates to food prices?
Ricky:Yeah, I think that's a great place to start. I think I'm optimistic that food price inflation is going to continue to come down. But I have to be very careful and be clear. That does not mean food prices are going to come down. Yeah, I mean probably most of your listeners are aware of this, but food prices in a nominal sense very rarely come down. In fact, we've only happened we've had that happen once on a national scale having nominal food prices decrease year over year. We've had that happen once in the last 60 odd years. That happened in 2016. And I don't expect it's going to happen in 2024.
Ricky:If you look at the current USDA forecasts the food price outlook, which I'm that's the first place I look to when I'm curious to see what's the consensus, where a thing is going to head. Right now, usda is forecasting the widest range that I have ever seen for food price inflation, going into a calendar year. You know, ever right. It ranges from significant deflation to very, very high, much higher than average inflation, and I think that represents just a lot of uncertainty, all the moving pieces that are affecting food prices. But I will tell you that most of the metrics that I follow, that I keep an eye on most of them. There are, course, exceptions you mentioned eggs but most of them are moving in the right direction, and by right direction what I mean is returns to historical norms and returns to relative stability.
Ricky:So we're seeing meat prices come down. Most fruit and vegetable prices come down. We're seeing low and state a low and stable outlook for most major US land commodity prices. We're seeing a slow but steady recovery in energy prices, particularly relative to the highs we saw in the middle of last year. A lot of challenges still remain. We can dig into that. There's still a lot of supply chain challenges in terms of distribution and logistics and, of course, there's a global conflict, particularly what's going on in UK and Russia, that's continuing to affect things like grain markets, oils, cooking oils, preservatives, some raw materials. There are definitely challenges. I will tell you right now that I am optimistic for year over year grocery prices coming back down to about that two and a half 3% level, which means, of course, food prices will be going up again in 2024, but by about half what they're going up this year in 2023.
Phil:So, Ricky, I want to go back to something that you said which I really think is important for our industry. We've got to realize that prices are not going to go down, and how we communicate that to consumers are really probably the crux of something that retailers are trying to grapple with. The shopper sees high prices, blames the supermarket, which, in my opinion, is not justified. I would say that a lot of the CPG brands are to blame, but let's put that on the side. We want to communicate how climate change, how the war, is affecting our food prices, but that's really beyond most consumers as they're going up and down the aisles. So help me balance out and help our viewers and listeners, who are retailers, balance out.
Phil:How do we communicate this properly to consumers? They don't want to hear the prices aren't going to come down. Prices over the past three years are probably up You're going to know better than me probably about 20% to 22% over pre-pandemic levels. That's where they're hopefully going to stabilize. But for that shopper who's struggling, who's looking at the products on the shelf, who are having less chips in the bag or less ounces in beverages or in breakfast cereals, they don't want to hear this. So how do we communicate that this is our problem, this is the situation and there's not much we can do to get back to pre-pandemic level pricing.
Ricky:Yeah, I agree. I agree the messaging is really important. It's a major reason why I partnered with the Food Marketing Institute to help explain those ideas and there are some great resources out there from places like FMI and the National Grocer Association other trade associations that are attempting to sort of open that black box that you're referring to. You know you didn't use that term, but it's the idea that there's so much going on behind the scenes that drives food price formation, things that are bigger than these retailers, even bigger than the CPG companies, things that are happening way upstream, affecting agricultural commodity markets, affecting the cost of manufacturing and storing food, affecting the availability and cost of refrigerated transport from getting food from points A to B to C, and I mean there's a lot that I could sort of say in unpacking the issue that you raised in terms of the sort of like the consumers visualized. They come to the supermarket and they see these high prices and the only food company that they are directly interacting with in most cases is the retailer. So it's tempting to point fingers at those supermarkets. I think it's very important that people realize this can't be stressed enough that grocery is an extremely competitive industry and most retailers of course there are exceptions and we're not going to name any names, but most retailers are competing very fiercely for consumers food dollars, which means they're keeping their, their retail prices, as low as they can and they maintain operating margins that often are around 1% or even lower. For independent, smaller supermarkets it's probably lower than that. So it's a very, very challenging environment and a lot of retailers and other food companies are also navigating complex and challenging regulatory environments. But at the end of the day, when you go to the supermarket and you buy any food product, anything at all, from a head of broccoli to a box of corn flakes, that is sort of the sum product of all these machinations and markups that are happening behind the scenes that, for the most part, retailers have very, very little control over. For the most part, most retailers can't really control the process by which the foods that they sell are sourced, manufactured, stored, transported, and because of that, they're effectively dealing with these costs that are determined long before the food gets to their shelves. And just one point that I'll close on to answer that question I'm happy to revisit any of this.
Ricky:Federal numbers back this up. I mean, when you look at food price forecasts, what's going on with the price of food that consumers pay. Everybody looks at the CPI, the consumer price index, and I think that's smart. That's probably the best starting point for seeing what's going on nationally on average with food prices. But what gets overlooked and the USDA does have, the Economic researchers does have a data product on this is the PPI, the producer index, the producer price index, and that measures business to business prices and you can track these numbers anybody can.
Ricky:They're publicly available. You can look up PPI numbers for anything from food whole-sealing and manufacturing to storing to truck transportation all of these factors. And in percentage terms, since the pandemic hit in the United States, those PPI's are up way more than the CPI. So just a simple back of the envelope calculation indicates that on average for the retail sector, the challenge it's become a more challenging business environment. So I would join you in sort of pushing back on this narrative that retailers are out there pocketing these huge margins during a time that's very challenging for consumers. For the most part, retailers are sharing those challenges that consumers face because they too are facing higher and higher costs via everything that they need to pay in order to do business.
Phil:So let's talk about the fight and my word not necessarily your word, but the fight that's taking place right now between retailers and CPG companies. More of it's going on in the EU than it is here, but certainly, as the CPG companies are coming to retailers insisting upon price increases, the retailers are not just accepting them Probably the first time that we're seeing that but the retailer is saying you've got to substantiate it. I'm here for the shopper, I've got to be competitive to your point, and just because you want a 5% or an 8% price increase doesn't mean that I'm going to give it to you. So they're asking for more detail about that before they're just accepting it. Do you think that that's a whole new model that we're going to see and that it's going to continue and the retailers are going to be more successful in doing that?
Ricky:I do, I do, I think that's actually. I think what we're seeing right now is sort of just a taste of what's to come. I mean, I've been following the food supply chain very closely for over 15 years, mostly the retail sector. But of course, you can't understand the grocery sector until you understand where their food is coming from. And, as you well know, as most of your listeners probably know, we can see the farm sector. There's great data on what's going on in agricultural production and farm prices and issues like that, and we can observe the retail sector. We can see the prices that grocery are charging for food. What happens in between is largely a black box. There is a lack of transparency and, to your point, not just to consumers. It's not just that we can't see what these major multinational CPG companies are doing in terms of their sourcing and their pricing. Retailers have questions about it too, and they're starting to raise those questions rightfully, in my point Now, I'm not here to sit here and demonize these CPG companies, but I would absolutely join retailers in calling for more transparency, especially during a time when many of these companies, as has been well publicized and documented, are continuing to report record year over year profits and that raises eyebrows.
Ricky:It raises eyebrows right now because that was fairly defensible in 2020 and 2021 when consumers were forced into the supermarket. Then we can say, ok, well, these profits are driven by excessive volume and some of our increases in prices need to cover these increased labor wages and the costs of abiding by regulatory COVID restrictions and all these sorts of things and all these issues related to smaller work groups and everything here in 2023, going into 2024, much like the retailers, I have those questions to those CPG companies as to where are these record profits coming from, if not simply wider margins or markups, which would reflect the idea that we're currently in a situation where food prices are inefficiently high. So I would join in asking those questions as to how prices are formulated in the middle. And just to sort of come back to a question about what's to come in terms of the fight between retailers and manufacturers, I think we're seeing retailers position themselves to be better prepared for that tug of war as we head into the coming few years, and we're seeing that largely through major investments in vertical integration and store brands, those sorts of moves.
Ricky:I see those as being sort of like key steps in that direction, because right now, most retailers, if they want to stock their shelves and they want to provide the brands that their shoppers want, they're working through the CPG company says, as you know and as most of your listeners probably know, but this idea of vertically integrating brands whether we call them store brands or private labels, or or in store options, or or ready to eat, ready to eat, whatever you want to call it we are seeing an explosion and that activity among retailers and I think it's going to pay huge dividends, not just for the retailers who do it successfully, but for consumers, because it offers retailers, in my view, a very effective sort of bargaining chip and alternative when dealing with the CPG companies. I'm happy to dig into that more, but I'm also happy to see that playing out and a lot of retailers out there, both large and small, are starting to do that very effectively.
Phil:And if we go back during the pandemic, because of availability as well as pricing, we saw more consumers going to store brands. Having said that, when we look at CPG companies through their lens, and they've seen that more consumers are going to private brands, to store brands, we're seeing these retailers up the quality of their store brands, following the leads of you know all the in trader Joe's and you know what. What's been going on with law, laws for probably you know three decades from a quality standpoint. Why hasn't the CPG companies woken up and said okay, you know, every time we've got an investment call and our CEO or our CFO, you know, goes on and talks about we're going to raise prices and, to your point, higher than ever profits and higher than ever CEO salaries and bonuses for these food companies.
Phil:To me it looks like there's a bubble that's about to burst, that these CPG companies are thinking very short term, that they're raking in the profits, that their shareholders are raking in the profits, that their CEOs are raking in the profits. But it's got a burst because consumers aren't stupid. Consumers are going to store brands and consumers, in my opinion, are going to start boycotting for lack of a better word some of these brands that continue to reduce the size of their products, increase, you know, the price for retail and are spending enormous amounts of money on advertising and marketing and PR and social media. Frankly, with not a lot of substance behind it. I think that we're going to see a bubble burst, don't you?
Ricky:I have no choice but to sort of give you the classic answer that economists love to give, which is we're going to see what happens. I understand everything you're saying and I absolutely agree with the sentiment that many consumers are incentivized right now to move away from these big CPG offerings. I absolutely agree with that For a number of reasons, though currently still from my perspective. Just looking at the data in the United States, private label or store brand penetration, market share sales, however you want to find it is somewhat constrained. We're at. The last time I checked, the United States is at less than half of where Western Europe is in terms of their store brand sales, where over there the situation is largely flipped, where these store brands are very popular and pervasive and in many cases, these national brands that we think of, these multinational Coke, Pepsi, you name it, these are just examples are more niche. The question in my mind, which is very similar to your question about this bubble, is when is that dam going to burst? When are we going to break? Because right now I could be off by a percentage point or two, but right now I think in the US we're at something like 20% private label share. But what's interesting is anyone listing can look it up. If you just look up any survey work or research on, or consumer focal group work on, consumers perceptions of private labels I do it my own classes here at Cal Poly Time and time and time again if you expose shoppers to national brands and private labels in a taste test, oftentimes they can't even tell the difference. They're more likely than not to say that the store brands are just as good, if not superior, that they're offering flavors that they haven't tried before. So the latent demand is out there.
Ricky:And you touched on all the marketing that the CPG companies are doing, and I think that's a huge part of the equation, which is that, to the extent that food marketing is still effective, whether we're talking about printed circulars or social media ads or whatever it may be these huge multinational CPG companies that own so many brands and in many cases consumers don't even know that they're supporting this multinational when they buy, you know, a subsidiary brand. Their marketing budgets are absolutely off the charts and they're extremely good at driving and maintaining a name, brand recognition, end cap displays you know, eye level, shelf space in the supermarket very, very effective at that. And, alternatively, to the extent that food retailers are providing their own private label or sourcing from regional manufacturers or locally or whatever it may be. The marketing budgets and the and the ability for them to expose that is much more limited. So I think it's an uphill battle.
Ricky:I 100% agree with you that consumers anyone listening this is strongly advised to give those store brands a chance right to branch out, right to try something new, to see if you can't save some money and, you know, achieve that same level of success cooking at home. But I think it's going to take time and it's going to take inserted efforts by largely these retailers to continue to refine and improve their offerings and make sure that consumers are trying them right to put them on promotion right to advertise them, to engage in social media or whatever it takes to get the word out. And slowly but surely I mean you know, and again to your point the tide is turning. It's just slow. We haven't seen a bubble burst, we haven't seen a damn break. We're seeing, year over year, by percentage point after percentage point, that sort of national brand CPG share being being hacked away.
Phil:So put on your behavioral scientist hat for a moment. Do we still have a stigma against store brands and private label? Same way that we saw up with couponing? For many years We've seen food couponing decline, you know, precipitously. Are people still, you know, store brands? That's for poor people, that's for people who can't afford? The real stuff Is that still relevant?
Ricky:Oh, I think absolutely I teach. The students that I'm teaching now at Cal Poly are Gen Z. I think that's right, they're Gen Z. They're all 20, 21, 22 years old and when I kick off my private label store brand lecture in my food retail management class, they're all. If I ask what are private labels, there's always somebody in the room who raises their hand and says, oh, they're generics. And that kind of blows my mind.
Ricky:It really does. It blows my mind because I, you know, I grew up in the 80s. I remember generics in the super market Black and white, those black and white ugly things.
Phil:You open up the can of peas and they were brown.
Ricky:No, that's exactly right. And the can would literally say canned peas? Right, there was no, you know, it was just this bulk product with very limited information, and I find that interesting that that perception has sort of you know, filtered through, passed on to the current generation of shoppers. I think it's fading, but I really do think, by large, and it's a function of low. When we talk about, I'm simply naming them as examples, I'm not pointing them out as bad actors or anything like that.
Ricky:But when we talk about Coca Cola, Coca Cola is literally a household name. It's, it's, it's older than most of these retailers. Everyone knows it. People associate our modern image of Santa Claus with Coca Cola. Right, it's an extremely powerful, noticeable brand. And now you're putting Coca Cola up against you know, you name it any old store brand, you know Safeway Cola or Kirkland Cola or whatever it may be. And that again is an uphill battle in terms of perception and it's going to take time for that to change.
Ricky:Now I just want to wrap up on this question a positive note it is changing, right, it is changing where we're increasingly seeing the, the labels and the packages for these private label products. They're beautiful, right, they have their own unique. You know color schemes and fonts and all that and they're and they're increasingly recognizable. And what I actually think is a positive move is increasingly, if you notice, just as a shopper, it's less and less common for store brands to actually bear the name of the store where you're shopping. They have their own unique.
Ricky:I mean, that's a big move that Aldi has taken in the last few years, which is now they have developed their own names for their store brand, their private labels, which I think is a very smart move, and I think that's going to go a long way towards changing that perception of store brands as, like, well, you know, this retailer needed something cheap, right, and so here is retailer X's brand that, like you said, it's for poor people, it's not going to be very good, but if I'm really on a budget or if I'm worried about losing my job, that's what I'm going to buy. That is, that stigma exists. It's eroding, but I will admit it's eroding slower than than I would have thought.
Phil:And we're starting to see retailers for example just last night, in looking at targets, christmas time, holiday time commercials. They're good and gather is, you know, right up there up front they're really promoting it in a very positive way. You mentioned all the you know, the list goes on and on of retailers who are really marketing their store brands very intelligently and again upping the quality. And I think Aldi and probably Trader Joe's opened up the eyes of many retailers when Dave Nichols was up at Loblaws, you know, with President's Choice he changed the industry by and you know their number one product at that point was their chocolate chip cookies, because you know somebody there counted the number of chocolate chips in the Chips Ahoy product. At that point that was the number one chocolate chip cookie and Dave said, okay, I want more chocolate chips than the number one selling. And President's Choice was born with that.
Phil:So it's a story that's been around for a long time and in fact, even if we go prior to President's Choice, the now defunct A&P had Master's Choice, which was a terrific, you know above standard of the national brand's product and I would suggest the consumers just weren't ready for it for all the reasons that we've talked about let's move off of store brands and private label and in the few minutes that we've got, left Ricky looking to your crystal ball for 2024. We've talked about prices, we've talked about store brands. You know what are a couple other things that you're looking at for 2024? That's really gonna affect our industry and the way consumers look at food and purchasing food.
Ricky:Okay, well, let's see. I'll just start In terms of the major sort of trends that I think are gonna affect the industry. I have sort of like a good news bad news scenario, and this isn't on necessarily consumer behavior, really on just what we're gonna be paying for food. I do think that we're gonna continue to see the prices for most fruits and vegetables and animal products to come down For my and I'm sorry I'm breaking my own rule here prices coming down. No, we're not gonna see that Inflation coming down. We're gonna continue to see those retail prices stabilize and from the consumer perspective they're becoming relatively cheaper because overall average inflation is gonna be catching up to inflation on these products. You know meaning the dollar is gonna go further in buying these foods. Just most of the sort of metrics that I would keep a look at for those foods which, as most consumers know, have been very, very painful for a long time, are moving in the right direction. You know acreage is up, plantings are up, yields are up, inventories are up and most input costs, like feed, are heading down. So I think you know there's always potential for surprise. I think that's good news.
Ricky:There are persistent challenges that are simply not going away, and you know I'm talking about labor and truck transportation, and if you wanna have me back on the show just to talk about those issues, I'm more than happy to. I will just say I view those as systemic issues that were in place before COVID-19 hit American shores. Covid-19, in my view, just showing a flashlight on those issues. They were already here and, yeah, they were exacerbated simply by folks leaving the workforce as a result of the pandemic, but they were here and right now we don't have solutions for the fact that the average long haul truck driver in the US is 60 years old now and the fact that most independent supermarkets are unable to achieve full employment at any given point in time group of years. So those are major issues that right now we don't have solutions for, but I'm happy to chat about those anytime.
Ricky:I have a few ideas myself, then, in terms of sort of how the industry is changing from the perspective of consumers. It's not store brands, but it's related. We are seeing I don't have hard numbers on this, I don't know if anybody does, but just anecdotally and based on what I'm seeing in social media and you know, the internet and news stories and everything we are seeing right now the explosion of what I call the gross or not. I didn't make that term up, you know, but it's the idea of the grocery store eatery hybrid. You know. We have two or three of them in my town of San Luis Obispo in California.
Ricky:I view this as a positive development for retailers and for consumers. The idea is that retailers are getting better and better at offering options that are ready to eat ready to eat right there in the store. So everything from soups to sandwiches, to fried chickens, smoothies, lattes, all that kind of stuff, those offerings are becoming more and more commonplace. They are high margin offerings for retailers. In many cases they're repurposing inputs and products that might have otherwise gone to waste. So they're a good bet in terms of revenues and costs.
Ricky:Consumers love them. It makes shopping more enjoyable. It drives consumers to spend more time in the store and I'm predicting that we are going to continue to see more and more of that among supermarkets of all stripes the conventionals, the Albertsons and the progurs of the world, some of the larger warehouse stores. Of course, a lot of independence. We're seeing beer and wine increasingly offered in supermarkets, and that's a trend that I think is going to be picking up exponentially as we go into 2024 and beyond and it is going to change when we shop, where we shop and what we buy, and also how we spend our food dollars outside of the hall, because it's going to affect how many meals we eat out at bent restaurants.
Phil:Well, Ricky, great crystal ball, you are welcome any time to join us and to really make sure that our industry knows where consumers are going, what's ahead for all of us and with folks like you guiding us, it's destined for success. So here's to a great 2024, happy holidays and thank you for joining us today on Lost in the Supermarket. Thank you very much.
Ricky:Bye.