In response to the Federal Trade Commission's opposition to the Albertsons and Kroger merger, the two chains have added 166 more stores to the initial list of 413 locations to be sold to C&S, with the Haggen banner now included. The press release quotes Kroger CEO Rodney McMullen: "Importantly, the updated divestiture plan continues to ensure no stores will close as a result of the merger and that all frontline associates will remain employed, all existing collective bargaining agreements will continue, and associates will continue to receive industry-leading health care and pension benefits alongside bargained-for wages." One of the FTC's claims is that C&S won’t be a sufficiently robust entity to assure no future closings and job losses--calling it a “hodgepodge”--as well as to argue that it will result in higher prices for consumers. And so, to have more challenging industry conditions and operators go out of business (99 Cents Only) is suboptimal for Albertsons’ and Kroger’s merger aspirations.
Coincidentally, Albertsons reported quarterly results for the Dec-Feb period which offers a perspective into how the industry is faring as price inflation is moderating, but competition for volume intensifying. Albertsons--all the banners--reported a +1.0% comparable-store sales increase, excluding fuel. The increase was the sole result of pharmacy (GLP-1s) as grocery sales declined. Click-based sales (including curbside pickup and Instacart) increased an impressive +24% to become around 12% of sales. Offsetting this sales increase was a nearly -5% decline in “brick-based” grocery sales. Our data shows traffic up +3.3% for the period, suggesting the decline reflects a sizable decline in basket size and UPTs for grocery. The declines reflect the channel shift of affluent households from bricks to clicks and increased levels of consumer shopping around and just picking hotly promoted items (one of the contributors that we pointed to as factors to 99 Cents Only’s demise.)
We can see the extent of basket size decline in scanner data and when combining Placer traffic data with The Bureau of Economic Analysis’ personal consumption expenditures for food & beverage at home (shown below both in nominal and real 2017 dollar terms). The slide has been ongoing since early 2022 and is worse in real terms as nominal benefits from price increases. For the last two months, real is down -8%, whereas nominal is down -6%, i.e. relatively consistent with Albertsons’ figures. Albertsons is a big player that is winning market share – the result of: (1) strong loyalty benefits, (2) a modernized tech stack allowing for a strong app, targeted offers, and locally relevant selection, and (3) an emphasis on fresh and store standards. Loyal households were up +16% YoY for Albertsons. These capabilities of strength would make the situation more dire for the players losing share, like 99 Cents, especially with the cherry picking which robs the basket of margin.
Albertsons’ press release quotes CEO Vivek Sankaran saying, “We delivered another solid quarter amidst a difficult industry backdrop." Albertsons continues to point out that shrink levels and inflationary associate wages remain stubbornly high, which will lead to subpar earnings results for the next half a year (these were headwinds for 99 Cents Only as well). Albertsons is adept at finding cost savings to drive profit growth, but for the quarter, profits were down -13% year-over-year versus the prior nine months at -6%. Sankaran added, “We expect headwinds to be much stronger in the first half of fiscal 2024.” Given 99 Cents Only's high exposure to the difficult competition in the Los Angeles market, and its ongoing financial fragile condition, we know a little bit more of the “why now?” for 99 Cents.
Will there be others? Two weeks ago, we pointed to Amazon’s CEO letter to shareholders noting that customers were laser-focused on value and finding ways to save money in 2024. Our experience tells us that high-frequency purchases are the most susceptible to this consumer need/feeling, which is generally grocery. People will pay up for a discretionary item if they feel it still offers good value and because they rationalize that they won’t be making such a purchase weekly or monthly. Grocery is daily/weekly/monthly. As such, grocery in 2024 is about making your value stand out: loudly and disruptively. That is hard to do with national brands where Costco, Sam’s, Walmart, and others have a natural advantage because they purchase as much as 10 times the volume with their vendors. And so, we expect the successful grocery banners for 2024 will be the ones that can really amplify their private brand programs’ value and drive household adoption. Doing so will task their marketing, merchandising, product development, and supply chain (i.e., it will be a “holistic” challenge, where they need to execute and succeed on all elements). Consumer adoption of private label innovations has generally been low because it’s hard, and like many things, success requires scale and/or divine inspiration. The chart below shows what success can look like.
