Despite moderation in food-at-home inflation, UNFI--who broadly supports independents and natural & organic grocers--noted that consumers continue to shift purchases away from conventional grocers. UNFI CEO Sandy Douglas said, “Overall unit volumes remain under pressure and increased competition in food retail persists. Following a prolonged period of high inflation, consumers are continuing to buy less and are shifting some purchases away from the traditional grocery channel. This has led to negative volumes across the retail food industry and share gains by mass merchandisers and discounters.” Our data confirms this in strong traffic going to Trader Joe’s, Aldi, Walmart, and Dollar Tree whereas, Kroger shows muted declines (more on Kroger below).
UNFI is more volume-based versus inflation-driven (i.e., they are paid for moving products). By contrast, grocers benefit from modest inflation as they can drive higher gross-profit dollar growth, which then allows them to leverage SG&A expense. The gross profit rate can even modestly decline because they will get the SG&A leverage to drive faster operating profit growth. For UNFI, if inflation is so high, that price elasticities cause volume to drop or consumer to shift consumption to retailers that are not UNFI customers (like club, mass, and dollar), then its business model faces headwinds. Another obstacle for UNFI is larger grocers’ retail media networks (which UNFI doesn’t support), which are attracting dollars from the manufacturers that otherwise would go to trade spend that all grocers would benefit from.
On the topic of Kroger, the company reported Q4 2023 results last week and gave an update on the Albertsons merger. Additionally, CEO Rodney McMullen announced that the company is “building more new stores in a meaningful way that will support our long-term growth model.” We think that there are two reasons for the announcement. One, we suspect that this is a shift in capital away from customer fulfillment centers in new markets (i.e. at least compared to earlier long-range plans). And two, expanding stores means adding union-paying jobs; something that is part of management’s case to regulators and the Administration for allowing the merger to proceed (which, if it were to proceed, won't take place until the second half of 2024 or beyond).
The table above shows Walmart same-store sales growing 3 times the rate of Kroger during the most recent quarter. Walmart’s grocery business is twice as large as Kroger's--$264B versus $132B--making the outsized growth even more impressive. Over the past year-plus, Walmart has retained most of its customers and acquired new households above $125K in household income. By contrast, Kroger management noted declines for less affluent households, especially in the occasional shopper and non-loyalty/non-Kroger mobile app shopper. Placer’s captured market demographic data doesn’t support this; looking at just the Kroger banner, and household mix, visitor penetration by household income above $125K fell by 35 basis points. However, we suspect that management is accounting for the Ocado customer fulfillment center business that grew by 12% in 2023 to become a $12B business for Kroger (roughly 9% of revenue and a +70-basis-point increase in penetration of higher income households). According to the company, digitally-engaged households increased by 18% and omnichannel customers typically spend 3-4 times more versus in-store only shoppers. Another dynamic at play could also be that loyalty households are increasing their basket size with Kroger; whereas, less affluent/non-loyalty household are cutting their basket size and just picking promoted items. Combined, the Ocado and loyalty-engaged would impact the sales mix by more affluent, bigger-spending households.
For 2024, Kroger expects sales growth of around 1% in an industry with 1% inflation (i.e., they are not guiding to much increase in volume/share-of-stomach). Should that come to pass, it would mean ongoing market share gains for club, mass, dollar, and hard discount / value (Trader Joe's, Aldi, and Grocery Outlet).
