- Numerous news articles have begun to circulate about grocers “leaning on their suppliers to cut prices and capitalize on cooling inflation – and prevent shoppers from…turning to discount stores,” as read this week’s article in The Washington Post. We've previously noted that an inflection point for packaged food was looming, as well as was a concerted effort by grocers to sharpen the value of their private brands as a strategy to distinguish their offering (at the expense of national brands’ share-of-stomach).
- Similar to our discussion of dollar stores and non-discretionary retail categories a few weeks ago, one can see how traffic is bifurcating in the chart below between discount and conventional grocers in California. Over the past year, conventional grocers have been able to drive outsized gains in their top lines and "penny profit" (selling price less merchandise cost) because grocery prices were up double-digits. However, with inflation expected to ease to +3%-4% this year (per the FDA), conventionals need to stabilize traffic (versus the running mid-single-digit decline) for comp-store sales not to contract. Given the low margin rates in grocery and high fixed costs, contracting sales and penney profits can quickly eviscerate margins and profits. Grocers demonstrating greater private brand value is a way to drive traffic and penny profit. 2023 is going to be a difficult year for food retailers and manufacturers.
