Rising Food Costs Eat into Consumers' Savings at the Pump

Inside A Whole Foods Market Inc. Store As Profit Tops Estimates
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By Nathan Layne and Nandita Bose

Martha Franco says she hadn't really noticed the sharp drop in gasoline prices, even though the mother of three is always shuttling the kids around in her SUV. She has been paying closer attention to the soaring cost of meat instead.

"Meat and grains. Actually it seems like the price of everything is going up," Franco, 30, said following a visit to a Kmart discount store on the outskirts of Chicago, with her two youngest children and a bag of groceries in the shopping cart.

Retailers hoping for a lift to the year-end shopping season see promise in gas prices, which last week fell below $3 for the first time since 2010. Those savings, along with the effect of lower heating fuel, could amount to more than $2 billion extra a month for consumers, analysts calculate, enough to buy a lot of holiday gifts.

%VIRTUAL-pullquote-People talk about gasoline prices but you can't look at them in isolation.%Franco's attitude is a reality check on those hopes, though: higher food costs are eating into or eclipsing savings from gasoline, and a $2 billion jump in spending could be a much smaller bump after food inflation is taken into account.

"People talk about gasoline prices but you can't look at them in isolation," said Craig Johnson, head of consultancy Customer Growth Partners. "We think the psychological effect of record food inflation, because it's a bigger part of the family budget, is a key behavioral driver here."

Food prices, which the U.S. Department of Agriculture predicts will rise 2.5 to 3.5 percent this year, is one of the main reasons CGP forecasts holiday spending to rise only 3.4 percent. Most other forecasts call for growth above 4 percent.

Johnson estimates higher food prices will likely swipe about $10 billion out of consumer wallets in November and December compared with a year earlier, double the $5 billion boost expected from cheaper gasoline.

Big Budget Item

Food accounts for three times more of household budgets than the amount spent at the pump, and he believes food inflation is currently higher than USDA forecasts, running at a clip of 5 percent.

The net impact of lower gas prices versus higher food costs will be felt most by lower income households, which on average own fewer automobiles, said IHS (IHS) economist Chris Christopher.

Assuming the same amount of gas was bought both years, Christopher estimated consumers saved about $1.6 billion from lower gas prices in October versus the same month last year, while laying out $3.3 billion more on food.

"Remember everyone eats, but not everyone drives a car," Christopher said.

Fortunately for retailers, the fall in gas prices gathered steam and outstripped food inflation in the last month, leaving consumers with net savings of $760 million in October, compared with September, Christopher said.

Broad Economic Impact

The caution about food prices isn't universal. Joseph LaVorgna, chief U.S. economist at Deutsche Bank (DB), estimated a penny saved at the pump provides a $1 billion boost to consumers and that lower gas prices would have a broad, positive effect on the economy, even accounting for food prices.

With gas trading at about 27 cents a gallon lower than last year, that translates into annualized savings of $27 billion.

Still, retailers which offer gas, food as well as other items may be the best positioned, according to the companies themselves and analysts.

Same store sales results by apparel and teen apparel retailers, especially Gap (GPS), were among the biggest disappointments in October, according to Thomson Reuters (TRI) data, while Costco Wholesale (COST) did better than expected.

Benefits for Retailers

Walmart (WMT) told investors last month that lower gas prices should help its business. On Thursday, citing fuel prices, Wells Fargo (WFC) raised its earnings targets for convenience store chains Casey General Stores (CASY), Pantry (PTRY) and CST Brands (CST), all three of which deal in groceries and sell gasoline.

"Consumers only have so much money in their budget and when a commodity like fuel goes down in price, it has historically created 'space' for us to compete for a higher spend inside the store," a CST official told Reuters.

Sears Holdings (SHLD) said that it too could benefit, noting shoppers at its Kmart chain were more sensitive to changes in gasoline and other prices.

The fall in gas prices "will hopefully give them added shopping confidence heading into the holiday season," said Imran Jooma, executive vice president of the holding firm.

But standing outside the Chicago area Kmart, shopper Franco didn't display such confidence.

"Everything is so expensive and my husband's salary has not increased," she said.

13 Ways Beyond Coupons to Save on Groceries
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Rising Food Costs Eat into Consumers' Savings at the Pump
The best deals of the week go to loyalty card users. These items often include what are known as "loss leaders" -- items sold at little or no profit for the store. Why do stores do this? To draw you into the store, with the hope that you'll pick up other items as you shop. Some stores also reward you for spending more. Safeway (SWY) and Stop & Shop offer discounts at partner gas stations. Deals are also advertised in the weekly circular, and you can scan those savings onto your smartphone through apps such as Spoofee.com or SundaySaver.com.
You might like to see and feel every apple or potato you put into your shopping cart, but you can save as much as 36 percent by buying bags of produce. The same is true for multipacks of grocery items such as soap, toilet paper, soda and yogurt, especially at stores such as Walmart (WMT) and Target (TGT).
Many popular deli meats and cheeses sliced fresh at the deli counter may cost less than the pre-packaged variety. SmartShop found the same brands (including Boars Head and Alpine Lace) as much as 30 percent cheaper at the deli counter. You also get to buy the exact amount you need, reducing potential waste.
These racks, usually found in the back of the store, include a hodgepodge of items marked down by as much as half. That's because there is an imperfection in the packaging or the item is being discontinued. Check the expiration date to make sure that you're not buying something that's been sitting on the shelf too long.
Several new subscription services rival Amazon.com's (AMZN) Subscribe & Save service. ShopSmart likes FamilyCircle.com, Plated.com and Target Subscriptions. FamilyCircle.com offers organic produce and seasonal items that can be shipped to your home weekly. It's only available in Washington state, Idaho, Alaska and San Francisco, but there are plans to expand. Plated.com provides measured ingredients to make a chef's recipe from scratch. Target offers household and personal care items at a 5 percent discount (10 percent for REDCard holders). It also offers food, even though the selection is limited. The best thing about them: membership is free.
Shoppers can save as much as 60 percent by choosing the store brand over a national brand. Many people find the taste and quality of store brands to be just as good as the more costly brand names.
Walmart and Target, the big players in this category, offer savings of up to 70 percent on toiletries, drugs and other items. A recent Consumer Reports survey ranked Target better for customer service, quality of perishable items and cleanliness, while Walmart came out slightly ahead on price. Both will price match items you find cheaper at other stores.
There may be a stigma to shopping at dollar stores, but if you can get past that you can find some real bargains. Many leading dollar stores have been increasing the number of food items they sell. Family Dollar Stores (FDO) -- which agreed this week to be acquired by Dollar Tree (DLTR -- recently added 400 food items. Savings of up to 28 percent can be found at dollar stores over supermarket prices.
Club membership is down, but Costco (COST), Sam's Club and others are still great places to save if -- and this is a big if -- you have the space to store bulk purchases. ShopSmart found savings of up to 63 percent on some items. It also gives high ratings to some of Costco's Kirkland brand, including its bacon, laundry detergent and toilet paper.
Boxed gives you warehouse prices (and sizes) without paying a membership fee. Checkout 51 offers weekly specials on items such as Campbell's (CPB) soup or Prego sauces. You also get cash back for every $20 you spend. Flipp is great for checking store circulars for weekly specials. You can put items right onto your shopping list, and the app helps identify the best deals. All three of these apps work on Android and Apple (AAPL) phones and tablets.
Competition is heating up and that means more selection and better deals. Peapod and FreshDirect were among the first to hit the market, and they're still going strong. Now you can also check out Farmingo.com for farmers market products, DoorToDoorOrganics.comGoodEggs.comRelayFoods.com and Spud.com for organic and locally grown food. Of course, Amazon (FreshAmazon.com or Amazon.com/primepantry) and Google (GOOG) (Google.com/shopping/express) are trying to use their gigantic size to dominate this market. These services have varying order shipment minimums, delivery fees and subscription fees.
Convenience stores and drug stores may be easy to run into and pick up some essentials, but you'll pay top dollar for that convenience. ShopSmart's price check found these stores consistently charged a lot more, often more than double the price at supermarkets, Target and Walmart on basics such as milk, bread and eggs. A half gallon of milk at 7-Eleven costs $3.12. Compare that to the average supermarket price of $2.30. And a loaf of whole wheat bread at CVS (CVS) cost $2.91. At a dollar store the same loaf costs -- yes, you guessed it -- $1
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