Just over a year ago, we began to notice a large and durable shift in visitation trends to grocers, with value formats seeing visits increase +5 [_10] , conventional grocers declining -5%, and small-format specialty especially declining -5 [_10] . The 1-year trend was exaggerated by a consolidation in the shopping party size. During 2021, party size was larger as folks enjoyed getting out of the house and seeing what the world was like as we emerged from the pandemic. By 2022 the novelty had worn off, kids were back to school and hanging out with friends, and mom and dad were once again mainly shopping solo; we believe this dynamic accounted for several 100 of basis points of the decline. The rest reflected consumers shifting grocery formats to help mitigate the historic inflation in grocery prices.
- With the shift to value formats continuing in 2023, we see this as a significant consumer trend and something that conventional and small-format specialty grocers have to be concerned with. Since early in the pandemic, consumer price elasticity in grocery has been muted from the perspective of their suppliers. Prices generally went up, but volume was little changed. We can see that in the chart below, where nominal (i.e., current dollars) consumption of grocery is +28.4% above pre-pandemic levels; whereas real consumption (i.e., inflation removed from the calculation) is only +2.8% higher. However, this was a time period where consumers had excess savings, lots of stimulus checks were doled out, and worker confidence in their job and income security was high. Looking forward, none of these conditions apply and there is a high likelihood of material erosion in that job and income confidence. Moreover, all consumers are now highly aware of how high grocery prices have been pushed and very sensitive to additional increases. We suspect that these conditions are what’s causing the shift to value formats to build. And so, what’s behind that 28.4% increase?
Source: Bureau of Economic Analysis PCE Tables
- Food cost inflation was especially acute in dry grocery and processed foodstuffs (i.e., non-produce). The chart below shows that food-at-home prices have increased +24% since 2020, with produce and eggs up +20% and “everything else” plus non-alcoholic beverages above that. (Eggs have been wild.) What’s behind the everything else increase of +25%? Driving the +25% increase was a +32% increase in non-perishables.
- Why are dry grocery and processed foodstuffs up +32%? Like most things lately, it started from the pandemic and its impact on supply chains and commodity prices. We have all seen the out-of-stocks at our grocery stores. Getting goods on the shelves was hard; during a pandemic, it’s especially hard. In non-perishables, bigger, more-profitable, higher-resourced national brands were able to get more of their goods to the shelves than small brands and in many instances retailer brands (i.e., private label). As a result, bigger national brands were given more shelf space and because their products were on the shelf, they gained “share-of-stomach.” Retailer brands lost share-of-stomach. National brands’ market share increased from 81.3% in Feb 2020 to 81.9% in Feb 2022 (dollar share in measured channels per Circana).
- With their greater supply-chain prowess, increasing share-of-stomach, and the healthy consumer, national brands were emboldened to more than fully offset their higher supply chain and input costs. To do so, they raised prices and reduced promotions. They did so to the tune of keeping their margin rates intact. And so, if inflation is high and you keep your margins, you grow profits by a lot. We show this in the table below for Conagra. But many other national brands are similar; for example, from May 2019 to May 2023, General Mill’s North America Retail segment will have grown TTM sales by 28% and profits by +33%, or by $850M. That’s a lot of dough. Lastly, this is not just a U.S. phenomenon as it is in Europe as well, as was reported on by the WSJ.
- And so, from 2020 to 2023, the dollar value growth of food-at-home, or the grocery market, was driven mostly by the national brands. However, given the building shift to value, we think that changes. We think that for the next few years, the industry’s dollar value growth will be driven by retailer brands. As such, those retailers with the best quality, supply chain, capacity, and value for their brands are going to be the ones that win share-of-stomach. Adding support to this view is commodity costs for packaged food have now rolled over and are down YoY, as shown below. These lower costs are going to show up in lower retailer brand shelf prices, especially for the entry-level price SKUs, and disruptive prices. In measured channels, retailer brand dollar value share has gapped up over the past year. For February 2023, dollar value share is now 19.2% per Circana, up +110 bps YoY and up +50 bps to pre-pandemic. That gain versus pre-pandemic levels came from both new households buying and increased repeat. (Of note, the unit-share is higher than 19.2% given that retailer brands typically have distinctly lower shelf prices.)
- The grocers that stand out in retailer brand prowess are Sam’s Club, Costco, Trader Joe’s, Aldi, Kroger, Publix, Albertsons, H-E-B, and Target. Brands that offer deep value, such as Grocery Outlet and Food-4-Less are also likely to win share-of-stomach. Of note here, many of these retailers are non-measured channels (i.e., not captured in IRI and Nielsen’s data), such as Aldi, Trader Joe's, and Grocery Outlet. As such, the extent of the consumer shift over the past year is likely to be underappreciated by the industry. Where will this leave national brands? Likely with a sore stomach.
- We have written a lot on this food inflation topic over the past year. We also have a presentation on the outlook for the grocery industry, if interested, it would be a privilege to present it to you.