Q3 2023 results for Sprouts Farmers Market revealed comparable-store sales momentum, whereas Grocery Outlet’s high level of growth has slowed (which was self-inflicted). Moreover, in looking at the multi-year comparable-store sales CAGRs, Sprouts is driving an improvement in a slowing market (less inflation). On an underlying basis, Grocery Outlet is holding steady.
With respect to visits, Sprouts' trend clearly slowed in October. Grocery Outlet has seen year-over-year visits decelerate each month since July. The Fresh Market’s trend is holding steady at around -6% declines year-over-year. These trends are also consistent in the multi-year stack. Where things are changing is conventional grocery. Food Lion (an Ahold Delhaize banner) reported a slowing for Q3 2023, with comparable-store sales up only +1% (helped by weight loss drugs/GLP-1s). As shown in Placer, Food Lion’s traffic moved from growth in Q2 2023/July to declines in August, September, and October.
Ahold Delhaize CEO Frans Muller was quoted in its Q3 2023 release saying, “In the U.S....comparable sales grew by +1.0%. The reduction in emergency federal Supplemental Nutrition Assistance Program (SNAP) benefits, higher interest rates and the resumption of student loan repayments in October continue to weigh on customer sentiment. On its own, the reduction in SNAP benefits resulted in approximately a four percentage-point headwind to sales growth in the third quarter. While we were able to offset a large portion of this headwind through our strong value propositions...changing sales mix and increasing shrink contributed to slightly lower-than-expected U.S. margins.”
Virginia and North Carolina make up nearly 75% of Food Lion’s 1,100 locations. Below, we compare Food Lion’s traffic trend in these markets to Walmart. Walmart is suffering a similar trend, and this tells us that this is a macro dynamic and not the result of competition or an internal execution issue. (Ahold’s Giant banner primarily in Pennsylvania also displays the same slowdown.)
We also know that grocery prices are moderating, that consumers are “trading down” to produce and retailer brands, that SNAP was a four-point impact to Q3 2023, and that comparison bases are still distorted. Food Lion’s four-year CAGR was +26% in Q3 2023 compared to +27% in Q1 2023; Sprouts was +4.9% vs. +4.8%, i.e. little changed. And so, pandemic comparisons continue to create distortions and obscure the underlying “truth.” To conclude, excluding the waning benefit of excess grocery price increases and the lapse of enhanced SNAP benefits, we believe that it is too early to say that grocery demand has truly slowed. It may have, but we will need to see the entire month of November to make that call.
On shrink, Ahold management noted that, “The increase in shrink is a result of the current economic conditions and rise in social tensions, which is a real concern for both the safety of our associates and our customers. We are deploying additional solutions in stores including upgraded camera systems, self-checkout monitoring, anti-push out grocery carts, and in-store live surveillance to counter this negative trend. With the help of the measures that we are putting in place through our in-store actions to reduce shrink, and further volume support incentives from vendors, we expect this modest margin pressure to be transitory and pass in a couple of quarters.” Said differently, Ahold is telling packaged food vendors to lower their prices.
Sprouts has been working to improve its momentum through differentiated product for health enthusiasts and “innovation seekers” and Q3 2023 results demonstrate progress. The company also cited its smaller store prototype as a driver. In the chart below we show traffic per location to the chain vs. the 2022 new store cohort. Of note, Sprouts has a seasonal trend with Q3 2023 traffic below Q1 2023. This year that seasonality has been exaggerated. The 2022 store cohort has experienced less seasonality than the chainwide average.
For the quarter, both store comparable transactions and units per transaction (UPT) improved sequentially. Sprouts CFO Chip Molloy shared, “Our in-stocks are improving. Our innovation centers are adding new items into the stores that people are getting excited about.” Impressively, e-commerce (i.e., Instacart) gained another +16% to reach 12% of sales. Sprouts’ brand sales grew +14% to reach 20.5% of sales. Sprouts CEO Jack Sinclair stated, “In-stock, sampling and service stores were added to the store goals at the start of the year, resulting in the highest customer service stores in our company's history.” We see evidence of that as the store conversion rate improved. (Happier customers result in an improvement in conversion rate and more items in the basket.)
Sinclair also shared, “We are also in the midst of developing a loyalty plan to further engage our customers.” The loyalty programs for conventional grocers like Kroger and Albertsons have been a pinnacle driver of customer loyalty and market share capture. As such, this is a significant opportunity for Sprouts and the initial pilot is to be launched next summer.
On expansion, Molloy stated, “We'll get approximately 35 stores in 2024. Beyond that, we've got 100 sites that we've signed up in our real estate committees, and we've got 70 leases that are already signed...So, we feel confident going through 2024, 2025, and 2026 that our store portfolio growth will be in line with what we've been anticipating...In 2024, it's probably going to be about a 50-50 between what we call established and non-established markets. So think about it from Florida, the East Coast is probably going to be 50% of those stores, and the Southwest of the West Coast is going to be the other 50%.”
Grocery Outlet's Q3 2023 comparable-store sales were adversely impacted by a -2% decline in comparable ticket stemming from less product on the shelf (i.e., out-of-stocks resulting in fewer items in the basket). Comparable transactions held relatively steady at +9%; however, traffic is also slowing and suggesting an erosion in conversion rate (see out-of-stocks). The shelf disruption stems from an upgrade to “a new store portal that will provide operators with improved data to make better purchasing, merchandising and marketing decisions. One important component of this upgrade is a new store portal that will provide operators with improved data to make better purchasing, merchandising and marketing decisions...The transition to these new systems has resulted in ordering and inventory disruptions that have impacted third- and fourth-quarter results...We anticipate the transitional impact to be largely behind us by the end of the year,” said CEO RJ Sheedy. CFO Charles Bachar added, “With respect to the top line, we expect Q4 2023 comp growth to be approximately 2%, which assumes a 300-basis point headwind from the system transition.”