Washington Insider -- Tuesday

Food Retailers and Price Strategies

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

USDA Sued Over Missed Deadline on GMO Labeling Report

USDA is being sued for missing a deadline to issue a report on digital and electronic disclosures under the GMO labeling law. The suit was filed August 25 in U.S. District Court for the Northern District of California by the Center for Food Safety.

Under the GE Labeling Act, USDA was to have issued a report on using electronic means or something other than actual product label to convey the information to consumers. That report was to have been issued by July 29, 2016, according to the suit.

"In court, statutory directives matter — not tweets," said George Kimbrell, legal director of the Center for Food Safety. "We won't let the Trump administration get away with ignoring the law."

USDA is required under law to have its final regulations in place implementing the law two years from its enactment – or by July 29, 2018.

"Because the results of the electronic/digital link study are a necessary precursor to the development of the final rules, further delay of this process is likely to delay the rules themselves, causing still more harm to the public and the stakeholders, who have already waited many years," the groups said in the suit.

Trump Again Threatens NAFTA Exit to Pressure Canada, Mexico in Talks

President Donald Trump again threatened to pull the U.S. out of the North American Free Trade Agreement (NAFTA) as the NAFTA 2.0 talks have just started, making that threat over the weekend and repeating it Monday.

"I believe you will probably have to at least start the termination process before a fair deal can be arrived at," Trump told reporters during a joint press conference with the president of Finland at the White House. "Because it's been a one-side deal for Canada and for Mexico. ... It's been unfair for too long."

The U.S., Canada and Mexico are to start round two of the talks in Mexico City Friday and they are scheduled to run through September 5.

Trump repeated his claim that Mexico was being "very difficult" in the talks, saying that was expected since they had a "sweetheart deal" via the agreement.

One issue of contention that surfaced in the first round of talks held in Washington was on a U.S. stance that they want to see the domestic content for automobiles raised, a proposal that Mexico has rejected.

Trump also reiterated his view that Mexico would pay for the wall that Trump is seeking to build along the southern U.S. border with Mexico. "We need the wall. It's imperative. We may fund it through the United States, but ultimately Mexico will pay for the wall," Trump said. He also said he hoped it would not be necessary to threaten a government shutdown to get Democrats in Congress to go along with funding the wall, a threat he made last week.

Washington Insider: Food Retailers and Price Strategies

The retail food business is intensely competitive as studies have shown over the years. Still, most retailers would rather do almost anything than lower prices. So, the spectacle of perhaps the most dyed in the wool, high price believer of all, Whole Foods Markets moving to lower prices is creating economic shock waves.

In fact, this is not the first time Whole Foods has tried price cutting. Months before Amazon announced it would be shelling out $13.7 billion for the grocery chain, Whole Foods made a surprise announcement of its own: It would begin lowering its prices.

In a report this week the Chicago Tribune says that the April announcement was born of necessity because Whole Foods was experiencing the longest sales slump since going public in 1992 and investors had begun pressuring the company to rethink its strategy.

The high-end grocer has long resisted lowering its prices, which has earned it the nickname "whole paycheck." Even now, the Tribune says, “the few times it has attempted to become more competitive, results have been spotty, sending profit margins lower without driving up volume.”

"The reductions have, quite honestly, been haphazard and they've done very little to change peoples' perception of the company," said Neil Saunders, managing director of GlobalData Retail in New York. "This has been a perennial problem for Whole Foods with no good solution."

Still, as Amazon completes its takeover this week it says its first course of business will be to immediately slash prices on key items, including bananas, avocados and eggs. "We're determined to make healthy and organic food affordable for everyone," Jeff Wilke, chief executive of Amazon Worldwide Consumer, said this week. "We will lower prices without compromising Whole Foods Market's long-held commitment to the highest standards."

It was an obvious move, analysts said, but also a symbolic one. Whole Foods has had a complicated relationship with its prices - executives have long maintained that they charge a premium because they sell superior products - even as consumers and investors have been outspoken about company's premiums in a famously low-margin business. Back in November, chief executive John Mackey had told investors that he was "not participating in a race to the bottom" by cutting prices.

In fact, it was thought that the high prices allowed Whole Foods to enjoy higher profit margins than its competitors. In the most recent quarter, for example, it had a profit margin of 2.9%, compared to 0.8% at Kroger and 2.4% at Costco.

The prospect of declining profit margins is less of a problem, analysts say, for a technology giant like Amazon, making it possible for Seattle-based company to double down in way Whole Foods couldn't on its own. "The difference is, Amazon doesn't really care about its margins very much - and neither do its investors," Saunders said. "Longer term, they know Amazon's deep cuts will lead to more shoppers." Well, we will see.

The company plans to begin selling Whole Foods' private-label brands through its website, as well as its AmazonFresh, Prime Pantry and Prime Now programs, beginning this week.

But the challenge, some say, will be preserving Whole Foods' high-end image while lowering its prices and making its products widely available. “How do you become a low-priced supermarket and still retain that cachet?" said Jeffery Inman, a marketing professor at University of Pittsburgh and president of the Society of Consumer Psychology. "They've got to figure out how to toe that line."

A year ago, Whole Foods opened its first lower-priced concept with a smaller store footprint called 365, to help the company's "price image." Initial tests had been successful, executives said. The company also said it planned to cut $300 million in costs, in part by rethinking its labor scheduling technology.

"You have to be price relevant, and nobody wants to feel like they're being cheated," John Mackey, co-founder and chief executive of Whole Foods, said in a call with analysts in February. "And so does Whole Foods need to be the cheapest or least expensive retailer out there? No. But we also can't have too big of a gap, or people will feel like we're trying to take advantage of them."

But even closing that gap, as Amazon plans, may not be enough to turn things around overnight, analysts say.

"Everyone thinks the sky is going to fall because Whole Foods is lowering its prices on milk and eggs," said Michelle Grant, head of retailing at Euromonitor International, a London-based market research firm. "But people have their own routines and habits. It's a very competitive market.” How much more food will you really buy? "Just because it's cheap doesn't mean you're going to hoard milk and avocados."

Clearly, the Amazon-Whole Foods lash up will continue to be interesting in part because no one really knows what Amazon intends to do with the food retailer. It is a stretch to even imagine Whole Foods as the “cheapest retailer.” But, it may well be quite different than it was in the past—an evolution that will be important to watch closely as it happens, Washington Insider believes.

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