The question on everyone’ s minds when hogs were bringing 10 cents two years ago was “why are pork prices in the grocery store still strong?” The answer is that retail margins depend on many factors, of which pork supply is only one part.
Retail pork margins have remained mostly steady since jumping dramatically three years ago. Traditionally, retail prices increase when there is a run-up in hog prices and then decline more gradually when hog prices fall. In 1996 and 1997 the retail price rally followed tradition, but the decline since then has been small. This has resulted in wider retail margins, says Steve Meyer, National Pork Producers Council’s director of economics.
One reason retail margins have stabilized at a wide point is the increased presence of pre-packaged, case-ready products, says John Story, a meat industry consultant who spent 40 years in the retail sector. Retailers must pay more for such products, which narrows their margins. So, they make up the rest elsewhere – in this case, fresh pork that’s not case-ready. Case-ready products will have increasing impact on retail margins in the future.
Margins aren’t expected to go down any time soon, because of the changing products and services that retail stores provide.
“Everyone wants a convenient, one-stop shopping experience and in most cases the retailer provides that, so he keeps more of the value,” says Meyer. “The retailer also is giving more of the margin to packers who provide further-processed or case-ready products.”
Meyer says the division between packer and retailer margins has always been fuzzy and is getting more so as more packers provide further-processed or case-ready products, saving retailers time, money and responsibility.
Story believes margins will stabilize in the future as retailers learn how to manage the new products.
For example, retail meat managers will recognize that even by making a little less money on case-ready products, profitability will balance out because they’ll reduce shrink loss, which can be as high as 8 percent to 10 percent, says Story.
Then there’s the question of accuracy, which has always surrounded USDA’s retail pricing data, says Meyer. One provision of last year’s mandatory price reporting legislation requires USDA to improve its retail price data. Congress recently appropriated funds for a pilot project.
Long term, three things will determine retail margins, according to Story.
1 Costs come first, which follow wholesale prices with a time lapse of a couple months.
2 Competition is next, which may or may not allow an individual retailer to raise prices at any given time. The flip side is also true:Waning competition or reduced price pressure from consumers may allow margins to stay wide. Retailers have to sell meat in bulk and need to understand consumers may shop for the best price available.
3 Supply and demand is the third influence. For example, even when pork supplies are large, if the demand is strong, retailers will run few if any specials. That has been the case with pork periodically during the past two years.
“Every dollar that producers make has to pass through the retailer’s hand first,” says Meyer. “The more money consumers put in at the beginning the better chance more can come down to producers.”
Due to the strong economy, consumers have been able to spend more money on pork. When the economy is strong consumers tend to buy what they prefer, and price is less of a deterrent.
Still, a grocery store manager’s goal is not to make money on pork, necessarily, but rather for the entire store to turn a profit. This causes retailers to use a strategy called “loss leaders.” This means stores will run specials on one item that will actually lose money for the store, but will draw in customers to buy enough other products that the store will make money overall.
Pork has traditionally been a strong draw, says Story. Past volatility in wholesale costs is one reason pork could fill that niche, but that volatility is decreasing, making pork a less attractive loss leader today.
“Pork is rarely a loss leader now. It almost always makes the store money,” says Meyer.
Story’s one piece of advice to producers is to eliminate the production fluctuation from the market. Story also stressed the continued movement toward more pre-cooked products and brand labels, continuing the trends started with pumped and marinated products.
“Two things producers need to understand about retailers is that they don’t need to sell pork, they will sell whatever makes them money. Secondly, higher retail prices are good, because moving product at a higher price is a strong reflection of demand,” says Meyer.
Much communication and coordination is still needed for producers, packer/processors and retailers to provide a consistent pork supply to consumers.
“Producers and retailers need to get together a little more to form a better understanding of each other’s situation,” says Story. “In the past, if producers were producing pork efficiently, they would produce as much as they could without much thought for retail. At the same time, retailers were bidding down prices, because of over production. The industry as a whole needs to have some real understanding of a cohesive market.”