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Grocer Margin Squeeze

Why It's Time to Short Your Grocer

Written by Brian Hicks
Posted January 6, 2011

Bernanke must not buy groceries — or fill his car with gas, for that matter.

He thinks inflation still isn’t a problem.

That's what happens when you've either lost touch with the common man, or you're still reading core CPI numbers, which cut out food and energy costs.

As any grocer can probably tell you, CPI isn't accurate...

And we’ve only just begun to surpass record food price levels of 2008.

As long as the Fed ignores reality for an inaccurate CPI read — opting to push ahead with stimulus, as promised yesterday — consumers and businesses will suffer.

Businesses that can't pass on the higher cost will especially suffer.

As the Fed pointed out in its minutes:

Although the prices of some commodities and imported goods had risen appreciably, several participants noted that businesses seemed to have little ability to pass these increases on to their customers, given the significant slack in the economy.

That's a real problem.

It's getting tough out there for grocers

And it’ll cut into grocer profits through margin shortfalls and demand.

When food inflation first reared its ugly head again, investors cheered, thinking grocer stocks would rocket by increasing prices more than costs were rising. 

That didn't exactly go as planned.

Grocers pulled back hard, especially when Safeway said it was having trouble passing along cost increases in some categories. Kroger, too, saw a drip in gross margins.

In what was hoped to be a turnaround year for these guys, grocers are suffering as costs rise.

And many of them are still left asking, "when do we pass on the cost to consumers, and at what cost?"

Some say they'll raise prices gradually; others are barely making ends meet.

Pass on higher costs too quickly, and you're screwed in a weak economy. 

The harsh realities of the aisles

According to The Wall Street Journal, Stater Bros. has seen prices for cereal rise some five percent -- but it's only been able to pass about half of that increase to its consumers.

Other grocers are simply struggling to get buyers in the door. Competition has led to lower food prices while food costs have skyrocketed. And commodity prices are likely to skyrocket further on Fed policy.

For stores like Supervalu (SVU), the situation is dire. Its prices are higher than its competitors'. Customers aren’t coming in great volume. And its costs for food are understandably rising.

There’s no way the company can produce good number with food prices still on the rise...

Whole Foods (WFMI) is another franchise that could suffer -- not just on analyst rating cuts; but also on higher food costs and falling profit margins from competition.

Even The Fresh Market (TFM) could take a hit, as traders are generally pessimistic on the natural foods grocer.

It would seem hopes for stronger grocery store earnings have been dashed.

As long as these companies can't raise prices to offset higher prices, the bottom line suffers... And the stocks could come down even more.

Short grocer stocks at will.

Stay Ahead of the Herd,

Ian L. Cooper
Editor, Wealth Daily

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