>The Record, 31 October 2017

by SYLVAIN CHARLEBOIS (AIMS Senior Fellow)

Food inflation continues to be an illusion in Canada. According to Statistics Canada, food prices have dropped once again over the last month, by almost 1%. Food prices are below the general inflation rate, just as they have been for most of the year to date. The food distribution landscape is much more competitive and cost cutting measures are the priority for most players in the industry.But the restaurant industry is experiencing something very different. Prices are going up, way up

Indeed, despite deflationary pressures, food service seems immune to what is happening with food prices in general. The cost of food purchased at restaurants rose by 2.7% over last year. That is almost double the rise in food prices at retail. While food purchased at restaurants became 0.2% more expensive in the last month, food prices in grocery stores dropped by 1.3% in the same period. Menu prices are still moving up, while retailers are trying to figure out how to remain competitive. These are good times for the restaurant industry.

Essentially, this unique phenomenon can be explained by how consumers view and manage their relationship with food these days. People eat out, eat on the go, or eat at their desks more often than ever before. Meals in the traditional sense are slowly disappearing in Canada. As a result, almost 30% of our food expenditure is now devoted to the food service industry. Last year, food service sales were up by almost 4% while food retail barely moved, with a rise of about 0.7%. This is the main reason retailers are looking at omni-channelling their goods, to reach the consumer any way they possible can. E-commerce, meal kits, ready-to-eat meals, food trucks — all are ways retail is trying to adapt and keep up with an increasingly transient consumer.

Convenience is trumping price now as a key decision factor for an increasing number of consumers. So food inflation data may be hiding the fact that Canadian consumers are in fact paying more for food, not less. They just seem to be spreading their food budget around more.   

Americans reached the 50/50 mark just last year. Consumers in the U.S. are now spending equally at restaurants and at retail. At our current rate, Canadians could reach that benchmark by 2030, perhaps even earlier. For the food industry, and apart from  what non-traditional grocers like Costco and Wal-Mart are doing, this represents a seismic shift compared to the last few decades. Retailers will need to remain competitive with aggressive pricing, new ways to engage consumers at the point of purchase or online, and most important, with new and different talent.

Most grocers, including Loblaws, Metro and Sobeys,  have laid off workers to cut down on costs. But to prepare for what is happening across the industry, grocers will need to think differently; in fact, they will need  a paradigm shift in the way they think about food retailing. To get there, grocers will have to take on new people — human capital — who believe the grocery business should embrace new ways, new technologies, and new methods in order to follow changing demand. This is what is happening right now.

It’s no longer about setting up nice merchandising displays, a perfect pyramid of tomatoes or apples, or even making sure the aroma of the bakery section is strategically synchronized with the peak shopping times in the store. It’s about consumers finding time to shop for food amidst all the other  daily tasks, and with their struggle to achieve a healthy work/life balance while still having high quality options.

Catering to a new crop of demanding consumers is no easy task, especially in a context in which food deflation won’t go away. A stronger dollar has helped, particularly for consumers with an appetite for  a healthy diet. In the last month, prices for fresh fruit have dropped by more than 4%. Fresh vegetable prices dropped by a whopping 7%, in one single month this fall. These are spectacular decreases which  we have not seen in at least three years in Canada. The meat and seafood sections are also experiencing continual decreases in recent months, but nothing to help a grocer’s top and/or bottom line. 

In food service, we have seen some consolidation, but we also have seen new independent restaurants and new chains emerging with innovative approaches. We have seen grocers acquiring pharmacy chains, meal kit providers, and specialty stores. We shouldn’t be surprised to see grocers search harder for inspiration from the food service industry. Grocers will continue to find ways to follow consumers, and their money.

As for consumers, they seem willing to pay more when they eat out. But if you are looking for savings, don’t go to a restaurant. Eating at home has always helped people save. These days though, it’s become even cheaper.

 

SYLVAIN CHARLEBOIS, Dean of the Faculty of Management, Professor in Food Distribution and Policy, Dalhousie University.