Get Ready - Meat Prices Rising 7/10/2008 6:27:00 PM
KANSAS CITY (Dow Jones)--U.S. grocers are beginning to raise meat prices to a new plateau, and consumers will have to adjust.
The move to higher prices, especially for beef, is seen as a necessary evil because of rising wholesale and production costs that some link to record crude oil prices and energy demands. Other analysts say energy demands are only a small portion of the total picture and that poor crop years around the world have a greater effect.
Whatever the cause or causes, the costs of production and transportation have risen sharply over the last year or so, and aren't likely to go down to former levels again, the analysts said. Up until now, retailers appear to have been biting the bullet and using meat features as loss leaders - items advertised at below-cost prices to entice shoppers into the store where they can be counted on to buy other products.
But for some, the loss-leader route hasn't worked too well, analysts and traders said. In some cases, shoppers have been picking off the features and going someplace else for their regular shopping, they said.
So, the grocers see no point in offering loss leaders if the action results only in the loss, according to the analysts. They might just as well raise prices, even though it could result in lost sales for a time.
But the change could take time, the analysts said.
David Herrick, a market analyst at Urner Barry's Yellow Sheet, said he expected retail prices to rise slowly and unevenly to their new plateau for the next 1 1/2 years.
The full effect of higher transportation costs haven't been felt by the consumer yet, Herrick said, and grocers will return to standard operating margins.
BEEF
Beef movement over the Independence Day holiday was said to be good overall, but scattered and mostly within expectations. Retail beef buyers were happy with the flow of product from the meat cases, but the outlook for the summer months is for less enthusiasm from shoppers.
Kevin Bost, president of Procurement Strategies Inc., said beef features are slowing after the holiday's fairly aggressive featuring. There are a couple of reasons for this, and the reasons have a part in what he sees as retailer plans for summer beef features.
Wholesale beef prices continue to rise, cutting into retailer margins and in many cases taking them into unprofitable territory. Continually losing money is getting old, and grocers say they are planning to keep nudging prices higher until they regain previous margins, Bost said.
That isn't expected to help retail sales since "higher prices never have helped movement in the past," Bost said. However, with export and domestic markets pulling on the current beef supply, a case could be made for expectations that movement should slow a bit for a while, he said.
Until consumers become accustomed to the new, higher prices, grocers will have to run their beef promotions differently, Bost said. In the short run, retailers will be cutting advance bookings of beef and other meats, he said.
Current out-front wholesale prices for beef aren't particularly attractive for profitable retail specials anyway, Bost said. Retail buyers likely will fall into a hand-to-mouth buying and featuring pattern in which retailers plan few features and pick up most of their needs in the spot market.
That will make for fewer advertised products in weekly newspaper supplements but more in-store specials and more volatility in spot markets through the summer, the analysts said.
The average price of the 15 cuts of beef in the Dow Jones Newswires survey was $3.95 a pound, compared with $3.92 a week ago and $3.80 a year ago.
PORK
Wholesale pork and chicken prices offer good alternatives to beef right now, Bost said.
Bost said he expected to see more pork and even chicken features in coming weeks, but others said planning for such features probably would fall into the same hand-to-mouth buying patterns as they expected to see in beef.
Herrick said a switch away from beef may not be universal across all major retail markets. Some may feel they've featured chicken long enough and just have to move to a red meat, no matter what the cost, for instance.
Herrick said he expected this summer's advertised meat specials to be a mixed bag, maybe even more mixed than usual.
Sue Trudell, vice president of EMI Analytics, said shoppers in any major city may be able to pick and choose between local stores every week and find a wide variety of marketing strategies and products.
The average price of the 13 cuts of pork in the Dow Jones Newswires survey was $2.37 per pound, compared with $2.44 a week ago and $2.31 a year ago.
POULTRY
A 4% decline in egg sets during the week ended July 5 is "enormous," Trudell said. The report bears watching because one week doesn't make a trend, but further cuts in egg sets mean lower chicken production after the Labor Day holiday, she said.
Current chicken production is below a year ago, Trudell said, but supplies of breast meat are ample for the time being after "less-than-stellar" Independence Day movement out of retail stores.
Wholesale breast meat prices aren't likely to rise abruptly in the next few weeks, Trudell said. There is a chance that grocers will push chicken products aggressively over the summer months, but she also expects to see a wide variety of meat features with no focus on any particular meat.
In addition to the egg sets, traders likely will be watching average live weights, Trudell said. High corn and fuel costs mean producing companies aren't profitable, and they could feed the chickens to lighter weights when slaughtered, further reducing the tonnage produced.
The average price of the four cuts of chicken in the Dow Jones Newswires survey was $1.56 per pound, compared with $1.44 a week ago and $1.49 a year ago.
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