In item posted here in March, I made the following statement:

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.

That article reviewed category retail unit price trends for the 4-week period ending 1/24/2009, which were up 5.5 percent across the store, but we were starting to see some sizeable price reductions in a number of commodity-price-driven categories.  Of the 123 studied categories, we found 11 with price declines of up to 12.4 percent versus the prior year.

But what a difference six months makes.  Since the end of January, unit prices have fallen rapidly.  For the 4-week period ending 7/11/2009, unit prices were up just 1 percent and the number of categories with price declines almost tripled to 30 categories.  Categories with the largest price compression include fresh eggs (- 24%), milk (- 19%), cheese (- 10%), diet aids (- 9%), baby needs (- 8%), fresh produce (- 7%) and shortening & oil (-6%).  None of these seven categories posted dollar sales growth and four of the seven saw dollar sales fall between 16 and 20 percent.

Consumer Packaged Goods Prices Have Dropped Sharply

July 2009 Unit Prices Up Just 1.0% Across the Store

Five of Seven Categories with the Greatest Price Increase Posted Dollar Sales Growth

My colleague Mark Laceky, Vice President of our Price & Promotion Practice, cautions retailers on price rollbacks, stating that price rollbacks reduce category sales as categories have far less price sensitivities than brands.  As price rollbacks are market-wide, there is no competitive advantage for individual retailers, so no inherent traffic gains are made.

These price cuts are providing consumers with exceptional value, but they are showing up in the form of weakening or declining department, category and same-store store sales trends for many U.S. retailers.  Just check out the latest monthly or quarterly same-store-sales trends for the leading food, drug, mass-merchandiser and warehouse/club retailers.  Retailer announced price reductions have been very common as of late, so don’t expect for the situation to improve in the near term.

These were some of the findings from the “Supermarket Pricing Trends” study which looked at pricing of the top-selling items across 45 categories over the course of five years. It concluded by measuring the 12 weeks ending May 16 in total U.S. supermarkets.

Overall, grocery prices continue to inch up 0.44 percent compared to a year ago. The sum of average unit prices across the 45 category-leading items, which included everything from bacon to bleach to buttered crackers and hot dog buns, was $143.65.

Private label items, however, are on the decline. On average, prices for store brands fell 4.7 percent versus last year led by a 23 percent decrease in whole milk and a 27 percent decrease in the cost of a dozen eggs. Some national brands in the dairy aisle are also seeing price declines. Some of these reductions are the result of pricing corrections for items with large price spikes in 2008.

Could this be a sign of more key items with lower prices on the horizon? This hasn’t happened yet, said Tom Pirovano, Director of Industry Insights, The Nielsen Company. “From all of the talk we’re hearing about deflation, it hasn’t happened yet. It’s a little premature because prices for many leading products are continuing to creep up.”

Pirovano notes the average unit price across the 30 category leading branded items grew 3.3 percent to $124.04 compared to the prior year.

One exception has been perishable items like dairy, produce and meats. Eight ounces of national brand cream cheese shrank 10 percent, 64 ounces of a leading orange juice brand can be had for 7 percent cheaper and a national brand of sliced cheese fell 5 percent.

The biggest price decrease was a dozen private label large eggs. Its cost plummeted 27 percent. A gallon of private label whole milk fell 23 percent and private label butter sticks is now 7 percent smaller. These price reductions are likely a result of lower grain prices where it’s less expensive to feed cows and chickens.

The study also highlighted the seasonal nature of pricing. Prices reach their lowest points each year in late spring and early summer. Conversely, prices tend to spike in January.