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Grocers' margins remain steady in November

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Grocers' margins remain steady in November

Wholesale and retail prices for food rose in tandem in November, signaling a standstill for grocers' margins, according to an analysis by S&P Global Market Intelligence.

The "final demand food" category of the producer price index, or PPI, increased 0.4% from November 2017, according to the Bureau of Labor Statistics, or BLS. The subindex represents the prices that retailers pay wholesalers to stock their shelves.

Meanwhile, the "food at home" subcategory of the consumer price index, or CPI, rose 0.4% in November over the same month in 2017, according to the BLS. The subindex represents the average prices that U.S. consumers pay for food at retailers.

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Grocery analysts and others in the industry use the difference between the two measures to determine the state of grocers' profit margins.

Analysts measure this spread by subtracting PPI growth from CPI growth. When the result is negative, grocers' profit margins are more likely to contract.

In November, there was no difference between the two growth rates, a sign that grocers' margins likely remained unchanged from October.

After a streak of deflation since early 2017, the spread between wholesale and consumer prices for food products turned positive in April — a sign that grocers' profit margins were expanding.

Analysts have debated whether Amazon.com Inc.'s August 2017 purchase of Whole Foods Market Inc., along with the expansion of budget chains Lidl Dienstleistung GmbH & Co. KG and Aldi (Süd) GmbH & Co., have increased pressure among grocers to keep prices low and competitive.

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Higher year-over-year wholesale prices for grains as well as fresh and dry vegetables contributed to the final demand food index's gain for November. Producer prices fell for fresh fruits and melons, oilseeds and eggs for fresh use.

Consumer prices for cereals and bakery products rose 1.3% in November, while prices for nonalcoholic beverages and beverage materials increased 1%. Subindexes for meats, poultry, fish and eggs as well as other food-at-home items each booked increases of 0.4%.

Those increases outweighed a decline of 0.5% in prices for dairy and related products as well as a 0.1% decline in prices for fruits and vegetables.

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The most valuable food industry deal in the month leading to Dec. 12 was CJ Foods America Corp.'s announced plan to purchase Minnesota-based frozen food maker The Schwan Food Co. Inc. for $1.84 billion. CJ Foods is a U.S.-based subsidiary of Korean food company CJ Cheiljedang Corp.

U.S. food giant The Kraft Heinz Co., meanwhile, said Nov. 29 that it would pay $200 million to acquire Primal Nutrition LLC, a manufacturer of health-focused condiments. Kraft will operate Primal through an incubator it created for emerging food brands in March, the company said.

Lidl US LLC, the U.S. arm of Germany-based Lidl, said Nov. 16 that it planned to purchase Best Yet Market Inc., a grocer with a network of supermarkets around New York City. The companies did not disclose the value of the deal.

Lidl has been expanding its U.S. store network after opening its first locations in the country in mid-2017, though the company has withdrawn plans to build stores at some proposed locations over the last year.

Other transactions during the period included Tivity Health Inc.'s Dec. 10 announcement that it would acquire health food maker Nutrisystem Inc. for $1.4 billion, as well as the divestment of a stake in Mondelez International Inc. by Bill Ackman's Pershing Square Capital Management LP, announced Nov. 14.