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Falling wholesale prices signal grocer margin expansion in September

A decline in wholesale food prices likely brightened the profit picture for U.S. grocers in September, according to an analysis by S&P Global Market Intelligence.

The "final demand food" category of the producer price index, or PPI, declined 1.4% from September 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, advanced 0.4% in September 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 September, the difference was positive by 1.8 percentage points, signaling that grocers' margins likely widened during the month even as consumer prices slowed their increase from a 0.5% rise in August.

The widening difference "could help grocer [gross margins]," Jefferies analyst Christopher Mandeville wrote in an Oct. 11 research note.

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 are expanding.

But some analysts have said 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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Declines in the prices of oilseeds, fresh and dry vegetables as well as processed young chickens led producer prices lower in September. Prices for milled rice, grains and processed turkeys rose during the month.

Indexes for five of the six food at home subcategories rose during the month, led by a 0.7% advance in cereals and bakery products. The index for dairy and related products was unchanged year over year.

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The most valuable food industry deal during the 30 days to Oct. 11 was Canadian supermarket operator Empire Co. Ltd.'s $618.5 million proposed purchase of Farm Boy Inc., an Ottawa-based fresh-focused grocer. The companies announced the deal Sept. 24, according to S&P Global Market Intelligence.

Another supermarket-focused deal involved the proposed sale of some St. Louis stores operated by SuperValu Inc. under the Shop n' Save name to Schnuck Markets Inc., a privately held grocer with operations in the Midwest. The value of the deal, which includes 19 supermarkets and 16 pharmacies and was announced Sept. 17, was not disclosed.

The quarter also included two deals involving notable players in the beverage industry. Keurig Dr Pepper Inc. said Sept. 27 that it would add sports drink maker Core Nutrition LLC to its holdings for $453.31 million.

Italian coffee maker and restaurant operator Luigi Lavazza SpA, meanwhile, said Oct. 1 that it would acquire Mars Inc.'s beverage business in North America, which focuses on coffee products marketed under its Flavia brand. The companies did not disclose the sale price.