This week, Lamb Weston, Conagra, McCormick, and United Natural Foods each reported quarterly results, which provided for a more nuanced understanding of the trends we've recently explored across the grocery and QSR categories. McCormick CEO Brendan Foley said, “Consumers are resilient but remain challenged. They are exhibiting value-seeking behavior, making more frequent trips to the grocery store with smaller baskets and shopping just for what they need. (Affirming what we said above and what we’ve been talking about this past year.) They are also focused on reducing waste and stretching their budgets. Foodservice traffic remains soft across most restaurant types, particularly in QSRs (although McDonald's continues to drive visits through its $5 Meal Deal). These trends are starting to benefit growth in food at home, and this shift is driven by older generations as well as lower-income households. Consumers overall continue to cook at home, and they are increasingly shopping the perimeter for protein and produce. This further reinforces their demand for flavor and McCormick's categories, included Spices and Seasonings...From a value perspective, we are seeing several trends. Demand for larger sizes remains elevated (this is the club channel taking share, as we discussed above).”
United Natural Foods CEO Sandy Douglas said, “We saw natural, organic, and specialty growth accelerate significantly in the quarter. And it's continued to accelerate further in the first quarter. We saw conventional in general start to improve but at a slower rate.” As shown in the figure below, Placer also shows that acceleration for the leading natural and organic grocery channel where the exit rate was +7.0% in year-over-year traffic.
Conagra’s food-at-home segment, like most packaged food brands, has been struggling with volume trends given share losses to private label and the other headwinds that McCormick described above such as the shift to proteins and produce. However, unlike most other brands, Conagra has been aggressively investing in price and promotions to recover volume and one can see the volume improvement in their slides shared below.
The volume share losses for Conagra's peers are going to the private brands of Costco, Walmart, Kroger, and others. Readers will recall that one of our themes for 2024 was that category growth and market share was going to be driven by volume growth of the best private brands and the retailers that create and offer them. Our data indicates that Aldi and Trader Joe’s share of visits is up nearly 80 basis points year-over-year. Given the increase in cross-shopping and the decline in industry basket size, the volume share gained is likely less; however, this is an industry where the national brands spend large amounts of marketing dollars to gain a few basis points of share. To lose “slightly” less than 80 basis points in a single year is traumatic. Moreover, looking forward as households build their comfort and appreciation for the brands and value of Aldi and Trader Joe’s, what reverses those gains?
Lamb Weston is significantly exposed to the QSR burger category, and it has had a very challenging year as the potatoes and frozen fry industry has come into a vastly oversupplied industry. On its earnings call Lamb Weston CEO Tom Werner said, “According to restaurant industry data providers, during our quarter, we saw early evidence of U.S. restaurant traffic trends improving during the summer months as QSRs stepped up promotional activity, and as consumers continue to adjust to the cumulative effect of menu price inflation...Importantly, traffic trends in QSR hamburger improved sequentially each month of our first quarter as promotional activity increased. We're obviously pleased with the growth in restaurant traffic, but it's important to note that many of these promotional meal deals have consumers trading down from a medium fry to a small fry. So, while we benefit from improving traffic trends, consumers trading down and serving size acts as a partial headwind for our volumes.”
As such, Lamb Weston could reduce capacity by as much as 10% due to the combined impact of idling certain production lines and permanently closing its plant in Connell, WA. If so, then they are probably on a path back to capacity utilization in the low 90s, which is closer to where their peers are currently operating in the low-to-mid 90s. Wow! That’s a lot fewer fries and down from near 100% capacity utilization last year. We can see this at the plants already; the chart below shows shifts worked at Lamb Weston’s Twin Falls locations; it’s running at 91% of 2023’s levels.
