Squeezed by rising food costs

By Pallavi Gogoi

updated 3:23 p.m. ET April 14, 2008

Twice a month, Kathy Nuthall does the math on food vs. gas costs: Shop for groceries near home in Warwick, N.Y., or drive nearly an hour round-trip to a Wal-Mart Supercenter in Monroe, a village in the Catskill Mountain foothills. With food prices surging, Wal-Mart has been winning that decision. "I just think that it's smart. The food is the same, but I'm saving more here," says Nuthall, who concedes that even with Wal-Mart's pricing muscle her grocery bill has been creeping higher in recent months.

The cost of food has become a headline story the world over, from food-related riots in Haiti and Egypt to some Asian governments mulling whether to restrict rice exports. In the U.S., grocery bills are surging: Nearly every food staple has seen a double-digit percentage increase over the past year, including a 38% hike for a dozen eggs, to $2.16, and a 19% jump, to $1.78, for a loaf of white bread, according to American Farm Bureau data. With Americans spending 15% of their household income on food and drinks, rising prices in the grocery aisles have spurred consumers to hunt savings. Of that spending, only half goes to grocery stores, with restaurants collecting the rest.

Food is the most visible expenditure on the typical shopping list: After all, most people eat at least three times a day. As prices keep rising, it's hardly any wonder that Americans seem to be losing their appetite for discretionary purchases. "When you buy the same thing week after week it's easy to see prices marching up, and the two items that people purchase most often are gasoline and food, both of which have seen a runup in prices," says David Wyss, chief economist of Standard & Poor's, which, like BusinessWeek, is a unit of The McGraw-Hill Cos.

Plus, when it comes to the weekly or biweekly shopping list, people tend to scrutinize more closely how much they spend with a Kroger, Wal-Mart, Safeway, or Supervalu than on casual dining with friends or a quick bite grabbed on the way home from work. On a recent wet, chilly day, Natalie Medina was pushing her 4-year-old son around the store, explaining that she has consolidated her shopping from weekly to every other week in a strategy to save money. Even though the store is farther from her home in Wallkill, N.Y., Medina says the reduced trips save money.

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The price tally in the latest American Farm Bureau market basket survey of 16 basic groceries was $45.03 in the first quarter, up 9% from the same period last year. Many of the price increases are eye-popping — a five-pound bag of flour cost $2.69, 26% more than last year. Volunteers in 32 states participated in the survey, with the 76 shoppers paying 23% more for fryer chicken at $1.37 per pound, while the average price for a gallon of whole milk was $3.81, up 10% from last year. Cheddar cheese was 27% higher, to $4.71 per pound, and corn oil rose 9%, to $3.01, for a 32-ounce bottle.

In this environment, some stores are responding by expanding their food aisles. For instance, Family Dollar Stores, which has 6,500 stores in 44 states, recently boosted its space for food in an additional 2,700 stores; 1,500 stores now accept food stamps. "We have strengthened our everyday assortment of quick prep and ready-to-serve products in all stores, introducing larger family sizes and emphasizing private-label and value brands," says Howard Levine, CEO of Charlotte-based Family Dollar, where food has been the biggest driver of sales in recent quarters.

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