For nearly two years we’ve been discussing about the corrosive effect of high inflation in essentials like groceries on consumer confidence and discretionary spending. Last summer, we noted that grocery inflation had stabilized and recently we called out some early signs that packaged/processed food prices were starting to fall. Many current Administration officials have called out the industry; for example, this CNBC article discusses Administration criticisms about "shrinkflation" rip-offs. Moreover, we also see the Administration’s frustration with high grocery prices excited in the Federal Trade Commission’s suit to block the Kroger-Albertson’s merger (reported on by the WSJ here).
Last week, we attended the Consumer Analyst Group of New York’s (CAGNY) conference where we heard from the largest national brands, including Pepsi/Frito Lay, General Mills, Conagra, and many others. What we heard at the event is that consumer packaged goods (CPG) companies are waiting out the current rate of low- to mid-single-digit volume declines and are not willing to meaningfully cut prices to stimulate demand/volume. They believe that we are still in a “transitory time” resulting from last year’s decrease in SNAP benefits and households eating more leftovers, wasting fewer scraps, etc. Moreover, with high inflation elsewhere--mainly food-away-from-home dining/meals (which we show in our updated food-at-home versus food-away-from-home chart below), they are waiting for households to come their way (versus having to induce them over by dropping prices).
April and May are the expected months for showing notable improvement. However, Placer data suggests the companies are too optimistic given the ongoing large traffic and volume gains for discount grocers. Traffic is up +10% for the aggregate of Trader Joe's, Aldi, Grocery Outlet, and other value-oriented grocers while conventional grocers are running flat (below). Additionally, scanner data shows branded CPG volumes at conventional groceries stores have fallen by around -2%. As such, there are two leaky holes at the bottom of the “volume bucket” for branded manufacturers: (1) losses to non-measured discount chains; and (2) losses to private label. (Recall last week’s results from Walmart, where large market share gains were made grocery.)
The last CPI print, showed progress in unlocking lower prices for grocery. More progress is needed, and it looks like a couple of months of more patience is required before that shows. Should we get lower grocery prices in May, that would be aligned with last year’s softer period for discretionary spend, leading to an improving trend for retail sales, especially discretionary, during the summer months which has been our outlook for 2024, a call that’s been delayed by one season. Also of note from CAGNY, the personal care and beverage brands--including P&G, L’Oreal, Molson Coors, Coca-Cola--were constructive on the health of the U.S. consumer. This is another good sign for 2024 given their large footprint/read on the consumer.
The dynamics for pet food are similar to that of human food, but more dire, especially for pet specialty retail (covered here). January-end quarterly traffic for PetSmart and Petco was down -4% year-over-year compared to -5% in the prior quarter, which also aligned with the CAGNY presenters which have business in the category, namely General Mills (Blue Buffalo), Smuckers (Milk-Bone), and Colgate-Palmolive (Hills). However, unlike with human food, these manufacturers are lowering prices and introducing value SKUs and product lines. Additionally, they are increasing their brand spend to drive more “top-of-the-funnel” activity. As such, we hope to see an improvement in volume and traffic in the coming months for PetSmart and Petco.
