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It's very hard to explain this to customers when they question why prices rise. So much of it is due to market forces and commodity prices, which are very abstract. Either way, we are the bad guy because their favorite product is more expensive than it was. Let's use Ground Beef as an example of a product we're all seeing on the rise. Ground beef (and beef in general) is taking on a HUGE increase this year. Why?
-Fuel prices: Rising Fuel prices make it more expensive to transport feed stock to cattle farmers. That cost gets passed on to wholesalers in the price of the beef when it is sold to the wholesaler. Then there is also an additional expense in the trucking of the beef from cattle farm to wholesaler, which is tied to fuel prices. Once the wholesaler gets their hands on it, processes it, sells it to retailers, and then trucks it to retailers, it has taken on even more expense. It becomes exponential. A dime in gas price increase can lead to up to a dollar or more in per lb. price once you figure in how many entities get their piece of the pie. We haven't even scratched the surface in figuring in the costs of having a human grind the beef (in a machine that requires daily maintenance), wrap it, label it, and then stock it in a refrigerated case (which is running 24/7). Fuel is also linked to the "Grocery Shrink Ray" we've been seeing. It behooves manufacturers to get more cases/units on a truck to lower the cost of transport per unit sold. The answer to that is to reduce product size and keep the retail the same to recoop the extra expenses.
-Gross Margin: Gross Margin (or GM%) is the percentage over wholesale that you take in by selling a product. Grocers generally try to make between 25-30% margin, because the costs of operating are extremely high. Grocers generally only see about 1% in profit out of that 25-30% Here's an example of how GM% works:
Wholesale cost of product: $1.00
Target Gross Margin: 25%
Retail= $1.33
(wholesale cost/.75 = retail price) .75 represents 100%-25% converted to a decimal form.
Now, let's say the wholesale price of that product goes up $.10. One would think that you merely increase the retail price by $.10, right? Wrong.
Wholesale: $1.10
Target GM: 25%
Retail: $1.47
That $.10 increase on the wholesale price of goods has now become $.14. It is crucial for Grocers to maintain that GM%, as expenses for labor, utilities, cost of goods, marketing, etc. continue to rise. It ain't pretty for consumers (I'm one too!), but it's the reality of operating a business.
Some interesting things to think about as a consumer when you're in the grocery store:
-The average meal travels around 1400 miles on trucks to get to the grocery store. Buying and requesting local products and supporting local enterprise reduces fuel demands ($$$) and keeps money in your region.
-Produce such as berries, cherries, corn, some types of tomatoes used to never be available on a year-round basis. Since consumers now want them year-round basis, we source products from California and Chile to maintain supplies. That costs some serious $$ that gets passed along to you. The risks of carrying super-perishable items like those causes the prices of the products around them to rise as a form of protection of GM%.
-Careless and lazy shoppers take a bite out. Every time someone picks up a refrigerated item in one department, changes their mind, then sets it down in a non-refrigerated (or frozen) environment, that product is lost. The investment made in the product from the retailer's end becomes a negative figure, and the potential profit is lost as well. Don't just pick things up and set them down where they don't belong. It only costs you. Find someone to put it back for you if you don't want to walk. Same thing goes for things you purchase and return. If it's a refrigerated item that you decide you want to bring back for a refund, we have to throw it away, as we can't guarantee that it was held at a proper temperature outside of the store. That makes your prices go up as well. We understand this when a product is not good quality, or has gone bad. It irks us when there's nothing wrong with it and it ends up in the trash, and you walk away with your money.
I hope I don't come off as preachy or too experty. I'm just hoping to add some information to help others be more informed. Grocers rarely jack prices on goods that aren't already rising. Even then, it is only done to protect Gross Margin. Interestingly enough, there's a price war going on in my area where everyone is taking huge margin hits on staple items to drive customer traffic. It's all a part of being competitive in a market where Wal-Mart continues to attract our customers.
I hope that helps. If anyone has any other questions, I'd be glad to try to answer them!
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