Supermarkets Are Stockpiling Food In Effort To Offset Cost Increases

The supermarket chains are doing this less to protect consumers than to protect their own margins and profits. 

The problem is that stockpiling is leading to shortages and higher prices for many staples. JL 

Jaewon Kang reports in the Wall Street Journal:

Supermarkets said they are buying and storing supplies to keep their shelves full amid stronger demand. Grocery sales in the U.S. for the week ended June 19 rose 15% from two years earlier. (But) stockpiling by food retailers is driving shortages of some staples and is challenging a U.S. food supply chain already squeezed by transportation costs, labor pressure and ingredient constraints. When prices start rising, food sellers often purchase more inventory than they need to protect their profit.

Supermarkets are stocking up on everything from sugar to frozen meat before they get more pricey, girding for what some executives anticipate will be some of the highest price increases in recent memory.

Some supermarkets said they are buying and storing supplies to keep their shelves full amid stronger demand. Grocery sales in the U.S. for the week ended June 19 rose about 15% from two years earlier and increased 0.5% from a year earlier, according to Jefferies and NielsenIQ data.

Stockpiling by food retailers is driving shortages of some staples, grocery industry executives said, and is challenging a U.S. food supply chain already squeezed by transportation costs, labor pressure and ingredient constraints.

The move is a reversal from last year when consumers hoarded groceries because of concerns about food availability, disrupting the food industry. Now, retailers themselves are stockpiling to keep costs down and protect margins.

“We’re buying a lot of everything. Our inventories are up significantly over the same period last year,” said David Smith, chief executive officer of Associated Wholesale Grocers Inc. The nation’s largest wholesaler for more than 3,000 grocery stores recently purchased 15% to 20% more inventory, mainly of packaged foods with longer shelf life, he said.

Keeping bigger supplies also helps Associated offer higher in-stock levels, as the food industry fights shortages of items like beverages and frozen food.

When prices start rising, food sellers often purchase more inventory than they need to protect their profit. Price changes have been minor in recent years, executives said, generally involving a pool of specific products. The current price increases are bigger and are playing out more broadly across supermarket aisles, executives said.

General Mills Inc., Campbell Soup Co. , and J.M. Smucker Co. are among food makers raising prices to compensate for higher costs. Meat and produce prices have been climbing, too, with retailers anticipating more increases through the rest of the year.

Supermarkets say they are passing along some of those increases to shoppers, who continue to buy more groceries than they did before the pandemic, as prices also climb for used cars, airline tickets and other products. So far consumers have yet to see the same price increases confronting supermarket operators, as grocers said they hold down some prices to better compete against discount or low-price chains.

Few retailers expect pricing pressure to ease soon. Worker shortages are keeping labor and transportation expensive, industry executives said, as companies boost wages and offer bonuses to recruit and keep employees.

“When you have a uniquely inflationary period like now, it’s a feeding frenzy,” said Tony Sarsam, chief executive officer of SpartanNash Co. The Grand Rapids, Mich.-based retailer and distributor is stockpiling about 20% to 25% more groceries such as frozen meat and boxed foods after more than 100 suppliers notified SpartanNash that they would raise prices, he said.

Other supermarkets are rethinking how they store inventory as consumer spending remains strong and pushes up sales.

Ahold Delhaize USA is holding more safety stock, said Chris Lewis, president of Ahold’s supply-chain company. He said total inventory is higher than it was two years ago, including 20% more supply of paper and cleaning products. Ahold Delhaize USA, which owns the Food Lion and Stop & Shop chains, is also expanding capacity in its warehouses.

For food sellers, stockpiling can require complicated math to determine what to purchase, when and how much. For instance, perishable foods can’t be stored for a long time, while bulky products take up more space. Grocers face the possibility of losing money if prices drop after they purchase inventory, though that isn’t expected to happen this year, executives say.

Stockpiling can also worsen shortages as food makers and sellers look toward recovery. The supermarket industry has bounced back from last year’s widespread shortages driven by consumers’ panic buying early in the pandemic. But retailers said they are now running low on some items, with many receiving about 80% of their orders from suppliers, compared with more than 90% before the pandemic.

“It runs the risk of making a bad situation worse,” said Mark Griffin, president of B&R Stores Inc., which is storing 10% more groceries including sugar, flour and cereal. B&R tries to negotiate lower prices if manufacturers push back on the volume the chain wants to secure, he said, while monitoring competitors.

“If Walmart raises prices, so will we,” Mr. Griffin said.