Economic Report: The New Three-Legged Stool

By Brandon Scholz, Wisconsin Grocers Association

It used to be that the grocery industry’s three-legged stool stood for competitive prices, quality products, and customer service. That’s still true today, but there is another stool in the room.

Inflation/higher prices, supply chain, and workforce are the issues that are driving the retail food sector — grocery stores, convenience stores, and other merchants that try to incorporate some food products in their aisles. Welcome to the other three-legged stool in the room.

Grocers are entering the fourth year of COVID/post COVID and the devastating impact the pandemic had on the retail food sector and consumers.

There’s no question that the pandemic-driven inflation rate of 8.9% is still crushing food and grocery prices even though inflation has started to settle back to familiar rates (around 3%+). Virtually every product that ends up in the grocery basket reflects at least a 3.2% price increase over the period, according to the U.S. Bureau of Labor Statistics.

Here’s the kicker: consumers expect prices on the shelves to decrease accordingly when they hear reports that inflation has subsided back down to ‘normal’ levels. That’s not going to happen real soon.

Traditional retail grocery businesses have between 15,000–75,000 products throughout the store. Every manufacturer, grower, producer, and other has struggled to maintain their costs during this period. But with the impact of the third leg, the “workforce” crisis, raw materials, fuel costs, and more, costs went up beyond their ability to control it. As a result, prices on the shelves increased drastically.

Once the supply chain is able to recover and get back to normal (whatever that may be), the expectation is that prices will go down. The change is hinged on wages and workforce as well as energy and fuel costs. But that’s going to take time. There’s not really a magic formula that says prices will go down accordingly as inflation decreases. In fact, the USDA projects grocery prices could increase by 1% in 2024.

One of the most difficult post-pandemic challenges has been how to recover the workforce that the retail food industry relied on to stay in business. In February 2020, the unemployment rate shot up from 3.2% to 14.1% in April and then eventually crept down to approximately 3.1%. But that’s not the whole story because as every employer knows, Wisconsin’s base workforce changed. There simply weren’t enough people who wanted to work or who were still in the workforce.

This is a major compounding issue as wages and benefits soared to new levels and drove expenses (and inflation) even higher. While every industry has had to face this situation, the retail food sector has not seen the return of the workforce to the levels needed to operate efficiently. And there has been no reduction in wages and benefits that were elevated during the pandemic.

The other 800-lb gorilla in the store is of course, the consumer whose attitudes, opinions, tastes, and demands change. The pandemic accelerated those changes to occur more frequently giving grocers less time to react and plan.

On their own, however, consumers move to ‘pocketbook’ survival and change their shopping patterns and what’s on their shopping list. Until there is relief, consumers will continue to back out of products based on price (whether they are high end products) and put fewer ‘indulgent’ items in their cart. They may begin to switch to more of a ‘bulk shopping’ trip with a bigger basket (purchase) but reduce the number of trips to the store.

While consumers may be spending fewer dollars at their favorite restaurant and shifting those times to meals at home, it is still an exercise in shopping on based on price. Excluding specialty events and holidays, the expectation is that consumers will stay on this path throughout 2024.

Consumers and others will notice subtle changes throughout the store. The most obvious is self-checkouts and robotics. Without a full workforce, empty checkout lanes will be converted to self-checkout stations and shoppers may start to see robots in the aisles working on stocking and inventory. Partstown notes, automation has recently become a growing trend in the foodservice world in general; in the grocery space though, it has the potential to become a new normal.

In 2024, the hope is that prices begin to come down as costs in the supply chain find ways back to pre-pandemic times. With that, and continued Fed-impacted controls on inflation, shoppers may see some relief and return to stable pricing. Just don’t expect to see this soon.

Scholz is president and CEO of the Wisconsin Grocers Association | The Wisconsin Grocers Association represents over 500 independent grocers, retail chain stores, warehouses and distributors, convenience stores, food brokers, and suppliers in Wisconsin.