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Food in Focus: Wholesale prices continue their rise in October

Wholesale food prices continued their growth in October, increasing faster than what retailers charged for the fifth straight month.

The "final demand food" index of the Producer Price Index, or PPI, advanced 3.2% during the month, according to the U.S. Bureau of Labor Statistics. The subindex represents the prices that grocers and other food retailers pay to stock their shelves.

At the same time, the "food at home" index of the Consumer Price Index, or CPI, rose 1%. The subindex represents what consumers pay for groceries at retailers such as Walmart Inc. and Sprouts Farmers Market Inc.

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Analysts use the difference between the two metrics to determine the state of grocers' profit margins, subtracting the growth rate of the PPI subindex from the growth rate of the CPI subindex. When the result is negative, grocers' margins are more likely to narrow.

In October, the difference was negative by 2.2 percentage points, according to data compiled by S&P Global Market Intelligence.

Producer prices for fresh and dry vegetables, grains and oilseeds rose the most during the month, while eggs for fresh use, shortening and cooking oils, as well as pasta products, notched the largest declines.

Consumer prices for dairy and related products rose 1.8%. They rose 1.5% for cereals and bakery products, 1.1% for meats, poultry, fish and eggs, 0.9% for fruits and vegetables, and 0.8% for nonalcoholic beverages and beverage materials. Other food at home, which includes salad dressing and chewing gum, increased 0.6%.

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Grocers' margins, while tight compared with profit margins in other consumer industries, have faced new pressure in recent years as grocers have made investments in new products, delivery and online ordering to compete with online retailers, most notably Inc., which purchased Whole Foods Market Inc. in August 2017.

Most recently, The Kroger Co. announced changes to its long-term strategy at its annual investor day Nov. 5, including providing more fresh food options. The grocery chain said Nov. 19, for instance, that it would work with a German company to grow produce hydroponically at two of its stores in Washington state as part of a pilot.

The Cincinnati-based chain also said Nov. 18 that it would locate an order fulfillment center in Wisconsin — its sixth to be operated with British grocer Ocado Group PLC. Kroger did not provide a timeline for starting construction on the facility.

Grocery sales continued to drive e-commerce results during Walmart's third quarter. The retailer launched its in-home grocery delivery service Oct. 15 in three U.S. cities.

The highest-value deal during the month to Nov. 14 was Dublin-based Valeo Foods Ltd.'s $82.5 million deal for Matthew Walker, a UK-based brand that makes Christmas puddings and other baked goods. Valeo bought the brand from 2 Sisters Food Group Ltd., a British poultry processor.

Other notable deals during the period included snack-bar maker KIND LLC's purchase of North Carolina-based Creative Snacks Co. LLC. KIND announced the deal for health-focused Creative Snacks on Oct. 15, though it did not disclose the price paid.

Private equity firm Brynwood Partners Management LLC said Oct. 23 that it would purchase Massachusetts-based Joseph's Pasta Company Inc. for an undisclosed amount. Joseph's makes ravioli, gnocchi, sauces and other ingredients for pasta dishes.

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