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Food in Focus: Wholesale prices weigh on grocer margins in August

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Food in Focus: Wholesale prices weigh on grocer margins in August

Rising wholesale prices for items including vegetables and pork menaced grocers' margins in August, marking the third month in a row during which producer prices rose faster than consumer ones.

The "final demand food" index of the Producer Price Index, or PPI, advanced 2.4% over the same month one year ago, according to the U.S. Bureau of Labor Statistics. The subindex represents what food retailers pay to stock their shelves.

Over the same period, the "food at home" index of the Consumer Price Index, or CPI, rose 0.5%. The subindex represents the prices that consumers pay for groceries at retailers such as Kroger Co. and Walmart Inc.

Grocery 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 August, the difference was negative by 1.9 percentage points, according to data compiled by S&P Global Market Intelligence.

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Prices for fresh and dry vegetables as well as pork led food producer prices higher during the month, while declining prices for eggs for fresh use as well as fresh fruits and melons fell.

Prices for nonalcoholic beverages and beverage materials led the consumer index higher, rising 1.7% year-over-year. Cereals and bakery products gained 1.2%, dairy and related products moved higher by 1.1%, while the categories for both fruits and vegetables as well as other food at home advanced 0.3%. Prices for meats, poultry, fish and eggs declined 0.6%.

Costs have increased faster than expected on dry grocery, dairy and pharmacy products during Kroger's fiscal second quarter, Senior Vice President and CFO Gary Millerchip told analysts during a Sept. 12 call to discuss the grocer's results.

Kroger had planned for inflation of between flat and 1% across its business, but costs of some products are "slightly ahead of that range," Millerchip said, adding that the company will pass the higher costs on to customers "where it makes sense in light of the competitive environment."

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Notable food industry deals during the month to Sept. 12 included Hershey Co.'s planned $397 million purchase of ONE Brands LLC, a maker of snack bars.

ONE, which is backed by CAVU Venture Partners, was just one of the moves that Hershey made during the month to expand its presence in the snacking business. The Pa.-based food company also made minority investments in Fulfil Holdings LLC, which sells nutrition bars in the UK and Ireland, as well as Blue Stripes LLC, which operates a chocolate shop in New York City. The terms of the investments were not disclosed when Hershey announced them Aug. 19.

Other big food companies reached agreements to offload snack brands. Campbell Soup Co. said Sept. 2 that it would sell its Kettle Foods Ltd. and Yellow Chips BV to Dublin-based Valeo Foods Ltd. for $80 million. The divestiture was the latest for the Campbell, which sold its Bolthouse Farms fresh food business in June and reached an agreement in August to sell international brands including Arnott's Biscuits Ltd.

Conagra Brands Inc., meanwhile, said Sept. 11 that it would sell its direct-to-store delivery business to Utz Quality Foods LLC for an undisclosed price.

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