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Are Increased Food Prices at Odds With Increasing Innovation?

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Earlier in the week, I attended the Food Marketing Institute's Midwinter Executive Conference in Orlando. It is the annual gathering of the top tier management of supermarkets, wholesalers and food manufacturers who meet to discuss the most important issues facing the industry.

Health and wellness, sustainability, job creation, the economy, the opportunity of social networks and meeting shopper needs were certainly discussed at length -- but probably the most important discussions overheard everywhere was about the impacts of rising food costs.

In 2011 we saw food price inflation at the retail level at 4.8 percent for the year and the USDA's Economic Research Service is projecting no more than a 3.5 percent rise this year. To the average shopper that is a bit hard to fathom as they have been stretching their budgets to pay those double digit increases on everyday essentials like beef, pork, coffee, cooking and salad oils and peanut butter. In fact, recent headlines have been blaring how beef prices will continue to rise and the cattle supply is down.

The USDA's annual numbers as you would sense, are based on averages across many food types and at times may hide the real strain on shoppers' budgets.

Or the strain on the supermarket and food company budgets. Both have been absorbing increases of both raw materials and fuel costs, then late last year they started to pass them on to consumers. Supermarkets are cautious to advance their pricing. They painfully remember how when the economy took a nosedive, their customers started shopping around and found lower food prices at more unconventional outlets including dollar stores -- and their sales suffered, and some shoppers never came back.

At the Conference, in one of the keynote addresses, John Compton, the CEO of PepsiCo Americas Foods and Global Snacks Group called for retailers to focus on repurposing money that is being wasted on excess inventory (which he said would generate $30 million per day of savings for each day inventory is reduced -- which now stands at 60 plus days for the industry) and to "repurpose slotting fees against understanding shoppers and building loyalty" (slotting fees are the monies paid to retailers by food companies to secure placement in their warehouses and store shelves). For retailers, this is a controversial suggestion, as it further chips away at the retailers' bottom line (the average net profit for supermarkets is between one and two percent). Compton also wants these savings to fund innovation at food companies, i.e., to create better, healthier, more exciting new foods and beverages.

Sounds vaguely familiar to many of the Congressional rants I witness on C-SPAN -- essentially moving money from one pot to another with a lackluster result (sometimes for both pots).

Innovation is key to growth for food companies, and adds excitement and many benefits for the purchasers of these products. However, I question whether repurposing funds is the way to go.

Perhaps it is time for both retailers and the brands they carry to look at the store shelves. Way too often there are tens, or even hundreds of me -- to items with similar ingredients and tastes in particular categories. I agree about reducing inventories -- but how about a look first at inventories on the shelf at the products that just don't sell.

Shoppers now have the ability to buy specialty or limited availability food items online from companies like Amazon, and that's where some of these products should be sold. In some cases it is even a more convenient shop. Compton warned the retailers in the room to take note what happened in the diaper category, which has seen an unprecedented shift from retail sales to online sales. What he did not mention was the ability to schedule regular automatic deliveries (you DO NOT want to run out!), avoid carrying cumbersome packages and oh yes, the lower prices.

There is a move towards smaller food stores (Walmart Express, Fresh & Easy, Trader Joe's, Aldi's, etc.) with greatly reduced operational overheads and far fewer 'me-too' products on their shelves; apparently retailers are figuring out how to serve shoppers better and reduce their costs at the same time. Perhaps the brands should follow the same path and look to shoulder innovation themselves.

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