While Americans have had many things to worry about during the recession and now the sluggish recovery, fast-rising prices at the supermarket were not one of them. The U.S. Department of Agriculture’s all-food index showed a modest 0.8 percent price increase from 2009 to 2010, and just a 0.3 percent increase in the price of foods consumed at home – the lowest levels of food price inflation since the 1960s. But at a time when many countries around the world are facing double-digit inflation on basic food items, can the U.S. be far behind?

The simple answer is no. The USDA is forecasting overall food prices to go up between two to three percent in 2011, due largely to the rising cost of commodities and lower supplies of basic ingredients – higher than the past few years, but certainly not the levels being encountered around the world. Demand for corn is at the highest levels in recent memory: supplies of the U.S. crop are at 15 year low as increasing demand from the U.S. ethanol industry is using existing resources. To get a better sense of how price increases could affect the average American household, it makes sense to look at overall food spending and how it compares to other countries.

Cost of Food
According to the USDA, Americans spent more than $607 billion on food consumed at home in 2009, and another $575 billion in food consumed away from home. For most of the decade, food eaten outside of the home was making steady gains, and by 2008, in-home and out-of-home food consumption was essentially on par. But the recession changed all that, and as consumers sought ways to save money, outside dining was one easy way to reduce household expenses.

The cost of food for the average U.S. household makes up a lower percentage of income than almost any other nation. Food accounts for just 6.9 percent of the average American household’s expenses, compared to more than 11 percent for the average Austrian household, 15 percent in a South Korean home, 42 percent in a Ukrainian home and 45 percent in a Pakistani home. On a per capita basis, that amounts to $2,208 in the U.S., $2,860 in Austria, but just $701 in Ukraine and $309 in Pakistan.

Inflationary Impact on Families
With that in mind, how might inflation affect the average American family? If the USDA’s forecast holds true, inflation of 2–3 percent would add $178 – $267 to the food bill per year. If inflation goes a bit higher than expected, say 4–6 percent, food would cost the average household another $356 to $554 each year – not an insignificant amount. But the real story is more complex. Consider the reduction in the social security tax rate for 2011: the decrease in the rate from 6.2 percent of income to 4.2 percent equates to an additional $1,000 in the average American’s wallet, enough to cover increased food costs and then some. And, we should expect increased demand for products and services in the U.S. as unemployment subsides throughout this year and consumer confidence builds.

With the cost of basic commodities such as meat, wheat, milk and eggs rising by high-single or low double digits, CPG manufacturers will need to raise prices. We think that most retailers will simply pass those costs on to consumers – a move that may prompt more households to shift to less expensive private label goods, which have already enjoyed solid growth over the past three years. A smaller percentage of retailers will resist price increases and will look to turn lower prices into a competitive advantage.

The stability of food prices during 2010 was a small blessing for families looking to control expenses during a time of economic uncertainty. But for retailers and CPG manufacturers, it has come at a cost. Unable to pass on cost increases to consumers, they have had to find new, innovative ways to maintain sales and margins. Some of this came through new product innovation, while others reverted to adjusting ingredients and package size. Now, however, it looks as if they may finally be able to justifiably increase prices as the economy improves and consumers show a renewed willingness to spend.

Cautionary Note: Global Oil Price Impact
With continued unrest in the Middle East and northern Africa and the resulting impact on global oil prices, we will likely see increased inflationary pressures from rising fuel prices have a similar impact on U.S. consumers as experienced in 2008 (i.e., shopping trip compression, more at-home consumption, value buying and increased coupon usage). Global demand for U.S. food in developing countries is great for U.S. exports, but those gains may also lead to higher food prices for U.S. consumers.

Eating healthy is a goal for most people, but often times a difficult one to regularly achieve. Work and family responsibilities often make time scarce, and it is easier to go out to restaurants or prepare ready-made meals at home. The recent recession also prompted many to search for value, and sometimes healthy options such as organic produce and other environmental considerations took a back seat as they are oftentimes considered more expensive than “standard” products.

The Nielsen Company gauged the world’s view of healthy eating, organics and other related issues earlier this year as part of a global online survey, polling more than 27,000 consumers in 55 markets from Asia Pacific, Europe, Middle East/Africa (consisting of countries from Saudi Arabia, Pakistan, United Arab Emirates, Egypt and South Africa), North America and Latin America. The views were diverse, but at the very least, most people want to do right when it comes to the foods they consume.

Healthy Eating Uptake Faces Barriers
Financial concerns (33%) proved to be a major, but not the primary, obstacle to healthy eating around the world. The biggest barrier was a perceived time crunch for survey respondents, with 35% of consumers agreeing to the statement that “I don’t always eat healthily because I haven’t got time”. Availability (26%), confusion about which foods are healthy (24%), substandard taste (25%) and the desire to treat oneself (41%) were the other main considerations preventing healthy eating.

Latin Americans were the most likely to cite time constraints as an issue—5% more than the global norm. Higher cost deterred North American consumers from healthy food choices, with an 11% higher score on this factor than the global average. Ready availability of, and confusion about healthy food was an issue for about one-third of consumers in the regions of Middle East/Africa/Pakistan and Asia Pacific. North Americans were the most likely to avoid healthy foods because of a belief that they don’t taste as good. Europeans and North Americans both scored highest at 44% and 45% respectively for opting for tasty, non-healthy treats in place of more healthy choices.

Organic Growth Takes Root
Organic foods, which feature production methods that reject synthetic materials and compounds, have gained a fair amount of media attention in recent years, and with good reason: they are popular with 40% of survey respondents, particularly shoppers in Asia Pacific where 47% said they buy organic, Latin America at 45% and Middle East/Africa/Pakistan at 43%. North America falls well below the global average, with only 24% of consumers saying they actively buy organic. Thirty-five percent of Europeans say they actively buy organic products.

People prefer organics for a host of reasons, including: the belief that they are healthier, pesticide-free, more nutritious, environmentally-friendly, taste better, not genetically-modified (GMO), supportive of small farmers and rural communities, the right thing to do ethically, and a vote against modern farming methods.

Asia Pacific shoppers lead the world in saying they buy organic because of the health and nutrition factors, while consumers in the Middle East/Africa/Pakistan region say they opt for organics as they taste better. But North American consumers lead the way on virtually every other criteria such as avoiding toxins, caring for the environment, keeping GMOs out of their diet, encouraging small farms, acting on principle, and rejecting current farming techniques.

Sustainable Shopping
Exploring the environmental attributes consumers consider when grocery shopping, the study determined that the most important criteria with global shoppers was the availability of locally made products (33%), stores that participate in fair trade practices (28%) and a selection of organic products (25%). Other green attributes on the grocery selection radar screen included green or ethical products (24%), products in recycled packaging (23%), farmers market products (21%), short shipping distances (18%), items with little or no packaging (17%), and products not tested on animals (14%).

What’s clear from this survey is that consumers’ hearts are in the right place: they generally want to eat more nutritiously and purchase foods that are grown, raised and produced in responsible ways. That said, when finances are tight, consumers tend to turn to those products that offer the most value, whether they are healthy and environmentally responsible or not.

Regional View Points

Asia Pacific
Consumers in Asia Pacific lead the world when it comes to intention to purchase organics (47% compared to global average of 40%). Compared to the global average, Asia Pacific consumers who actively buy organics are most likely to do so because they view organics as healthier (82% vs. global average of 76%) and more nutritious (57% vs. 51%). Consumers in this region who will not go organic are most likely to cite higher costs and taste preferences. The availability of fair trade products at the grocery store was important to 40% of respondents, which was the highest of any region.

Europe
Europeans know what’s healthy and what’s not, but are most likely to pick a non-healthy treat over a healthy alternative. Europeans were the least likely to purchase organics because they are more nutritious compared with other regions. Certain ethical supermarket shopping attributes resonated most strongly with Europeans compared to other regions: locally-made products, distance from point-of-origin, limited product packaging and no animal testing all rated high on the scale of factors that were important when shopping.

Latin America
Latin Americans demonstrated little confusion about what foods are healthy, but admitted that time constraints made it difficult to always do so. Consumers in this region showed the highest concern (38%) about the availability of ethically produced or grown products when grocery shopping, scoring 14 points higher than the global average. They also exhibited a high level of concern for products in recyclable packaging (38%)—15 points more than the global average.

Middle East/Africa/Pakistan
Time and expense associated with healthy eating pose the lowest barriers to this region in which consumers find themselves short on healthy eating options (31%) and are confused as to which foods are really healthy (30%). As a result, they are the least likely of any other regions to select organics because they are healthy, to avoid toxins and bypass genetically modified organisms. However, consumers in this region are the most likely to select organics because they taste better (59% vs. global average of 45%).  They are also the most likely of consumers in any other region (29%) to select products that come from farmer’s markets when grocery shopping.

North America
Aware of healthy eating options, expense was the primary reason they did not eat healthy, along with an unwillingness to sacrifice taste. Environmental and social considerations whet the North American appetite for organics, making it the region most likely to buy organics to avoid toxins (71%), promote environmentally-friendly organic farms (59%), help small farmers (58%), avoid genetically-modified products (45%), do the right thing (38%) and vote against modern farming methods (23%).

In the U.S., annual dollar sales for products with label claims such as organic, natural, presence of fat, vitamins, fiber, caffeine, gluten, etc. range from a high of $46.6 billion for products with fat claims to a low of $56.6 million for foods with plant sterol claims. Organic sales dropped significantly as a result of the economic downturn. In 2006, 2007 and into the third quarter of 2008, organics’ growth rates were strong, averaging between 18% and 30%+. After the September 15, 2008 financial crisis, growth rates for organics dropped dramatically. But there are signs of life in the last several periods, with growth rates nearing 10% in the four-weeks ending July 2010.

Note about online survey methodology
While online survey methodology allows for tremendous scale and global reach, it provides the perspectives on the habits of existing Internet users, not total populations. Where noted, the Nielsen Global Online Survey data is supplemented with the measurement of organic consumption by market.

Across 114 categories representing more than 99 percent of all department sales Nielsen monitors, six categories had price increases of greater than 15 percent over a year ago.  38 categories had price increases of 0 percent to 4.9 percent, while 11 had price declines. The top five categories with the largest price increases over the course of the year:

• Dry vegetables & grains 25%
• Flour 23%
• Jams, jellies & spreads (including peanut butter) 19%
• Car accessories 19%
• Pet food 16%

Higher commodity prices played a role in all of the food categories, while higher crude oil prices drove increases for motor oil in the car accessory categories.  Meanwhile, the following categories decreased in price:

• Fresh eggs -12%
• Milk -8%
• Candles & Incense -5%
• Light bulbs and telephone accessories -3%
• Non-carbonated soft drinks -3%

In the four week period ended January 24, 2009, unit prices across the store were up 5.5 percent – exactly the same as the 2008 Consumer Price Index calculated by the U.S. government.

“U.S. consumers would certainly benefit from lower prices.  But retailers should be careful with how far they push their manufacturer partners to lower prices. If they simply push for lower prices without planning for the right lower prices, they may find it extremely difficult to grow same-store sales this year,” said Todd Hale, Senior Vice President, Consumer & Shopper Insights at Nielsen.

Read the entire article about pricing trends in the lastest edition of Facts, Figures & the Future here.

So are consumer packaged goods (CPG) manufacturers and retailers, who have struggled in recent months to balance consumer demand for low prices and high value with abnormally high raw materials and transportation costs.

Rather than raising prices, some food manufacturers have reduced the size of their products.  Such strategies may minimize sticker shock at the grocery store, but are unpopular with U.S. consumers.

Instead, according to Nielsen, nearly half (47%) of American consumers would prefer to buy large, economy-sized products with lower price points per serving.

In comparison, only 17% of consumers surveyed by Nielsen said they would prefer CPG manufacturers to introduce new, smaller pack sizes at lower prices.  Another 9% suggested that CPG manufacturers downsize or modestly reduce the packaging size of products, keeping the price of the product the same. 

“CPG manufacturers and retailers have few options to manage rising commodity costs beyond absorbing increased costs, passing on increases to consumers by raising prices, or covering increased costs by downsizing offerings,” Todd Hale, senior vice president, Consumer & Shopper Insights, Nielsen, noted.  “Downsizing, in particular, is not a new option — we’ve seen downsizing over the last few years in a number of categories, including ice cream, cereal, candy bars, salty snacks, and paper products.”

View the media alert.

U.S. consumers are expected to purchase more than 110 million pounds or $215 million worth of hot dogs and 25 million pounds or $117 million of fresh ground beef for the July 4 holiday, according to Nielsen.  Meanwhile, carbonated beverage sales are expected to reach a whopping $1.5 billion – or more than 240 million cases, while at least 23 million cases of beer are expected to be sold in supermarkets alone.

But cost-conscious cooks may wish to forego the bun.  Baked goods have experienced the greatest price increases of all cook-out fare, and Nielsen’s analysis predicted that consumers will spend 19.5% more for fresh bakery buns this year vs. last year.  Prices for other cook-out mainstays, like potato chips and processed American cheese slides, are also significantly higher this year.

View the full Nielsen Release.