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Competition helps restrain food prices

Fears that increased consolidation among food retailers would result in reduced competition, less pressure on retailers to develop and improve the quality of their goods and services, and higher consumer food prices have proven unfounded, says USDA Economist Ephraim Leibtag.

“The opposite trend has taken hold,” he said at the annual USDA Agricultural Outlook Forum at Arlington, Va.

“Conventional food retailers now vie with discount supercenters, club warehouse stores, dollar stores, convenience stores, and drug stores that are increasingly offering a larger array of food products to their price-sensitive and time-pressed customers.”

In fact, he says, the share of at-home food sales for warehouse clubs and discount supercenters rose dramatically from 1991, with only 1.8 percent, to 2003, with 11.1 percent.

“Conventional food retailers also face greater competition from restaurants and other food away-from-home market options for consumer food dollars.”

Leibtag, with USDA's Economic Research Service, says conventional supermarkets have been forced to compete with these alternative food outlets by reducing prices and by finding ways to differentiate their product from those available at their competitors.

“The expanding services offered by retailers may increase their operating costs, but the competitive pressure from warehouse clubs, supercenters, dollar stores, and restaurants continue to keep prices for standard food items at relatively low inflation levels.

The all-food Consumer Price Index rose just 2.2 percent in 2003. It is expected to rise from 2.2 percent to 3.2 percent in 2004, as current trends in retail food markets are partially offset by the overall improving economy, pushing food price inflation slightly above 2003 levels, “but still fairly steady over the next year.”

Looking ahead, Leibtag says the first decade of the 21st century will likely see a continuation of the historical decline in average annual food price inflation.

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