Price War on food market leads Spain to deflation

What is deflation?

According to the INE (Spanish Statistical Office) the fresh food prices have been dropping for five consecutive months in Spain. The IMF defines deflation as a sustained decline in an aggregate measure such as the CPI for two consecutive semesters.  This sector has not been affected by this phenomenon so far but there is a growing concern as long as this section of items, being the most significant, represents around 20% of the spanish shopping basket.

Why is this happening?

The potencial customers have decreased due to the emigration and to the fact that former inmigrants are coming back to their countries. In view of the prolonged economic crisis and the lack of job opportunities, 400.000 people left Spain in 2013.

Meanwhile, the crops of vegetables and fruits last summer were outstanding in terms of quantity.  And to top it off, the Russian veto on the UE fruit has finally resulted in food surpluses in Spain.

The current setting

As a result, the main food retailers in Spain have begun a battle for market shares at the expense of trade margins. For instance, DIA, a major Spanish distribution company, has been able to increase its business volume from january to september, although its turnover fell 1,7% in comparison with the same period last year. [1]

Given this deflation context, some food industry sources suggest that the average fruit prices could fall to 4% at the end of 2014.[2]

http://economia.elpais.com/economia/2014/11/01/actualidad/1414861351_958953.html

In the long term this could translate into serious problems for the distribution sector that might be eventually temped to sell at prices lower than production costs. In this case, the Spanish fruit growers could be dragged to a difficult situation since they are the weakest link in the supply chain.

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[1] http://www.freshplaza.es/article/85835/DIA-reduce-sus-ventas-en-Espa%C3%B1a

[2] http://cincodias.com/cincodias/2014/10/30/economia/1414691579_625559.html