The Search for Value and Its Impact on Food Retail
McDonald’s CEO Chris Kempczinski on may have best summed up the current state of the U.S. consumer on the company’s Q1 2024 update a few weeks ago: “U.S. consumers continued to be even more discriminating with every dollar that they spend as they faced elevated prices in their day-to-day spending which is putting pressure on the QSR industry.” In turn, this has resulted in more consumers visiting value-oriented food channels (value grocery chains, warehouse clubs, and dollar stores) and fewer visiting restaurants across the U.S. during the quarter.
As we discuss throughout this week’s Anchor report, consumers will likely remain discriminating over the next several quarters. As such, we expect a continuation of the channel shifts we’ve been witnessing across the broader food retail sector. According to our data, the QSR category saw a +5% increase in visits from 2019-2023, while the full-service restaurant category saw a -8% decrease in visits (partly explained by the permanent closure of many smaller, regional full-service dining chains). Conversely, the grocery, superstore, convenience store, and dollar/discount stores have all seen meaningfully higher visit growth over the same period, indicating these channels are taking share from the restaurant industry.
Looking at McDonald’s cross-visitation trends during the quarter, we see further evidence of this shift. We’ve compared the favorite grocery chains of McDonald’s visitors in Q1 2024 to Q1 2023 below. We see a material increase in the percentage of McDonald’s visitors that visited an Aldi location year-over-year–24% versus 17% in the year ago period. We also see a decrease in percentage of visits to most conventional grocery chains.
Not surprisingly, McDonald’s plans to accentuate its value offerings in the coming quarters. On its update call, management noted that 90% of its U.S. locations offer meal bundles for $4 or less and that it has been running several promotions through its digital app. The company also noted the need to align around a strong national value proposition so that the company can use its tremendous media scale to drive high consumer awareness. It will likely take time for McDonald’s to organize around its value platform, but once it does start to promote its value offerings on a nationwide basis, we would expect much of the rest of the QSR category to follow suit and increasing competition across the broader food retail sector.
Cross Shopping Grocery Banners & Lower-Margin Baskets
Over the past two-plus years we have written about the high inflation and price levels in essentials, especially national brand processed food, along with its impact on consumer spending and traffic. We continue to view this trend as the most important impacting consumer behavior. While the increases have ceased, this week’s Consumer Price Index (CPI) summary from the U.S. Bureau of Economic Analysis showed food-at-home prices down month-over-month and roughly even with the end of 2023. As discussed above, inflation has led to households shopping multiple banners to find the best value for their spend and to cherry-pick hotly promoted items. We see this in a decline in spend per visit. The graph below shows spend per visit down 7% year-over-year by combining our visit data and Personal Consumption Expenditure (PCE) data from the U.S. Bureau of Economic Analysis.
We've also started to see a decline in average dwell time at grocers, reversing a trend that we saw in 2023. The table shows a -2.5% decline in average dwell time for the broader grocery category for the February-April quarter in 2024 compared to the same period in 2023. For retailers, the downside of this manifestation is lower basket size and less penny-profit per unit.
Also fostering the cross-shopping is the millions of feet of shelf space added for consumables since pre-pandemic as dollar and value retailers (Big Lots, Ollie’s, Grocery Outlet, Aldi, Dollar Tree, and many more) added the selection to drive traffic. (In the case of Grocery Outlet, just its 141 new locations and Aldi, 326 locations--see our analysis on How Big Can Aldi Become.) The persistent level of high prices has also compelled households to switch loyalty to those grocers offering disruptive value, like Costco, Sam’s, Aldi, and Trader Joe’s, as these brands have their own brands which allows for prices far below the national brands. The switching is also compelling grocers to amplify their household loyalty benefits, again a margin cost. While private label penetration is up and being expanded for all grocers, share-of-stomach is really up for these retailers. Excluding the club and mass channel, based upon visits, we estimate that hard-discount value (Ollies, Grocery Outlet, Aldi, etc.) has taken over 100 basis points of share-of-stomach from conventional grocery. Lastly, we also see the industry-wide stresses in Albertson’s soft financial outlook for the first half of 2024, Family Dollar closing over 600 locations, Big Lots in financial distress, and 99 Cents Only liquidating.
Department Stores V2.0
Given our recent articles on the next chapters of Macy’s, Kohl’s, and Nordstrom the release of Placer.ai Data Version 2.0, as well as our 2024 Outlook that it would likely be a better year for department stores, we thought we'd revisit the category. Below, we've shown year-over-year visit trends for several department store chains from February to April.
We consider Dillard’s to be a reasonable benchmark for success in department stores. For perspective, Dillard’s chainwide 2023 comparable-store sales increased +9% versus 2019, whereas Macy’s decreased -5.5%. And so, what may happen if Macy’s 2.0 strategy (350 continuing "go-forward" stores with 150 planned store closures, more tailoring to local market characteristics, increased service levels, and more focus) tracks Dillard’s path since 2018? A contributor to Dillard's success has been focus on a tighter consumer and geographic segment. And so, let’s focus on the regions that matter to Dillard’s.
Florida, Texas, and Ohio compose over a third of Dillard’s footprint. As shown in the chart below, these states have outperformed the average, with Texas being smoother. Nordstrom has only eight locations in Texas, so we are going to leave them aside. Looking at the remaining two, we see that Kohl’s has been on a stronger trend, save in early March. Macy’s has been challenged in Texas in aggregate.
Macy’s has 30 venues in Texas. We do not know which of the 30 stores are part of Macy's 350 go-forward locations versus the 150 to be closed; however, we do have Placer data. We selected 15 from the 30 that have retained visits versus 2019 better than the aggregate. The 15 selected Texas locations produced 12% more visits than the remaining 15 (on average) and 26% more than Dillard’s. Recall that Macy’s new strategy has generally yet to be implemented. For February and March, the 15 Texas locations produced a +3% increase in visits, better than Macy’s Texas locations overall, and only slightly behind well-tuned Dillard’s at +6.5% (in other words, these are good locations to improve upon). When viewed from the baseline of 2019, one can see that the traffic performance is tracking Dillard’s. And so, if the sample group of 15 Macy's Texas locations were to experience a lift from the said enhancements, a high probability in our view, that would suggest that on a multi-year basis, that they will outperform Dillard’s (additional analysis can be found here).
2023 visits between the two brands are very similar on a per-center basis but Dillard’s punches far above Macy’s in sales and in growth since 2019. Dillard’s has a notably higher conversion rate and higher ticket, and the gap in ticket widened between the two periods. This suggests that Macy’s has significant “benchmark opportunity” to close the gaps through its 2.0 strategies: better on-trend merchandise, more relevant merchandise, and a higher level of service/sway (i.e., conversion rate).
Specialty Retail Refocus After Challenges Across Industries
Specialty retail is in the process of redefining its value proposition to consumers and regaining its importance in the broader retail industry. As consumers continue to focus on deriving as much value out of their retail purchases, superstores, warehouse clubs and discount retailers have replaced much of the demand for single-industry specialists.
Looking at the first four months of 2024, many of the major specialty retail chains saw declines in traffic year-over-year. Compared to the visit performance of superstores like Walmart and Target, specialty retailer traffic has lost momentum. The Container Store’s decline in visits, echoed by their difficult earnings release, highlights the drop-off in home-related retail spend post-pandemic and also the pullback on discretionary categories (although there are exceptions in the home furnishing category). Many single-industry chains play in categories gobbled up by consumers during the pandemic, and as the industry moves forward, there may be more consolidation to come in order to find growth.
Where does the specialty sector go from here and how can single-industry retailers regain their position with consumers as the go-to? The core competencies of single-industry retailers have been knowledge, service and experience, but that doesn’t hold as much value with value-oriented shoppers. As inflationary pressures ease and consumers return to more bullish spending patterns, if retailers can maintain these elements, they may be positioned to take back some market share. Retailers need to lean into their specialty to drive a higher volume of visits, even if those visitors aren’t as loyal. The other avenue that has been successfully implemented across sectors are the shop-in-shop partnerships (or the store-as-a-service model, as we've discussed in the past). The specialty retailer gets the benefit of higher traffic and visibility, and the larger entity gains a better level of product and service curation and different types of shoppers; in the case of the upcoming Babies”R”Us + Kohl’s partnership, as showcased below, the retailer may be able to capture new consumers from buybuy Baby with the shop-in-shop concept and better compete with other broadline retailers.
The industry needs specialty retailers to exist and be competitive for the health of the overall retail industry and the U.S. consumer. It’s natural that as industries become more mature, the number of chains reduce, but they offer a unique experience for consumers and drive innovation by superstores and other chains. Specialty chains have the opportunity to redefine their value to today’s consumer and cement their place in the industry.
More Stuff and More Fun
With the pandemic recovery, 2023 was the peak year for “more fun” which came at the expense of “more stuff”. As shown in the table below, the spending increase on fun was 2.2x the increase on stuff. The subdued rate of growth on stuff was difficult on retailers, especially those retailers at the more moderate end, where spending was down mid-single-digits or more. That rate of decline in stuff, which has a higher merchandise margin than consumables, resulted in a substantial gross margin shortfall for the industry.
However, we expect 2024 to show more balance between more fun and stuff and with the March Personal Consumption Expenditures (PCE) report and quarterly management commentary we are seeing strong evidence that our outlook is playing out. This dynamic, along with the generally strong economy and spending (excluding lower-income households), will likely foster a good summer season for retailers, setting up strong momentum going into the second half of the year.
Virality Still Drives Traffic
Driving consumer demand is all about generating those “must-have” impulsive behaviors. In today’s retail environment, social media continues to be force in demand generation, despite many of the economic headwinds facing shoppers. The introduction of TikTok Shop over the past year has cemented that platform as a consumption vehicle for both content and product. 2024 has its own examples of virality spurring consumer visitation, proving that the close link between demand and social media remains.
As discussed a few weeks ago, Dairy Queen overcame the traditional winter ice cream slump thanks to two viral product introductions in Q1 2024. The newly launched Confetti Cake Dipped Cone as well as the consumer born Cupcake in a Cup both succeeded in driving traffic increases year-over-year, with February and March traffic combined up 27% year-over-year, far above its competition.
Brinker International's Chili’s concept has also been top of mind for social media consuming visitors, specifically those who have seen the Triple Dipper appetizer pop up on their For You Page (FYP). It might be the mozzarella sticks, but creators have been clamoring for a trip to Chili’s, and the influence on consumers is clear. Chili’s other plays to win over QSR visitors, like its new burger may also play a role in the recent rise in visits.
Looking at Placer’s traffic variance, year-to-date through the end of April, Chili’s visits are up 2% year-over-year. However, April, the month where the Triple Dipper videos took off, saw even stronger results, with the month up more than 6.5% compared to 2023. There is still a correlation between consumers’ social media feeds and their wallets, even despite the challenges facing visitors in the face of food inflation.
Non-Traditional Tenants Continue to Fill Shopping Center Voids
As shopping centers continue to evolve and shift their merchandising mix, we continue to see non-traditional tenants beyond stalwarts like department stores and apparel. Entertainment, and more specifically eatertainment, is one offering that draws crowds to malls. This subcategory that spans both dining and entertainment includes well-known chains such as Dave & Busters, Main Event, Topgolf, Punch Bowl Social, Chicken N Pickle, and more. As they say, pendulums swing both ways and as many shifted behavior to get delivery at home during Covid, there has been an equal and opposite reaction towards having a fun and social dining experience that mixes low key games and sports with crowd-pleasing food favorites. We’ve been following this trend for a few years now, and it appears to continue to outperform.
Another new type of tenant you might be seeing at your local mall are health-related retailers. Outposts for primary care and urgent care are entering mall territory, along with some that are more wellness or cosmetically inclined. Having healthcare in a shopping center is not so broad a stretch when you think of other types of essential retailers, such as grocers or services, that also reside there. In fact, having your primary care at a mall that you frequent might be a good reminder to get your annual checkup, something Americans are often woefully amiss about. However, healthcare is certainly a complex industry. Recent news about Walmart closing its health clinics was “not an easy decision” per their corporate press release as it was determined to not be a sustainable business model. But, where one door closes another one opens, and this week Kroger announced that it was opening 8 senior care clinics across metro Atlanta. Another angle within the competitive margins of healthcare would be to go the other direction and target a more affluent clientele through more elective healthcare, such as concierge medical services or personalized health programs.
Fitness is one tenant that is becoming the savior for some department store vacancies. In his homage to the Southdale Mall in Edina, MN,, our very own Thomas Paulson remarked on how a Life Time Fitness has overtaken the old JC Penney space at his hometown mall. At the same center, an innovative RH has opened a 3-level, 60,000-squarefoot-retail concept that encompasses RH Interiors, RH Modern and RH Outdoor. The RH Rooftop Restaurant is another example of how brands are creatively expressing their brand DNA in new categories and proving to be magnets for their mall customers.
Shifting Store Format Sizes: Going Big and Going Small
Call it the “Alice in Wonderland - Drink Me” effect. One of the more interesting trends happening today in stores is experimentation with store formats and shifting footprints. On the one hand, we have stores “going small” such as Target Small Format, Market by Macy’s, or Bloomie’s. On the home furnishings front, we have Arhaus and Ethan Allen also making a foray into more of a design studio approach. Many of these smaller store formats rely on a more curated assortment that is relevant to their local population. In the case of Target Small Format, that might be a scaled-down home decor section more suited towards apartment living, greater signage about delivery or pick-up-in store that still allows access to a broader range of Target merchandise, and a focus on essentials or more popular items in the fresh produce and snack section. Meanwhile, a typical suburban Target has a much broader selection within different categories, as well as oversize items such as bicycles or tables. While these smaller format Targets are just a tiny fraction of the Target portfolio, their year-over-year traffic percentage increase has been outperforming the last six months.
On the other end of the spectrum, we have retailers that are “going big” - that is creating experiential flagships to better bring the brand to life. Dick’s Sporting Goods House of Sport is one such example. These stores include larger-than-life concepts such as rock-climbing walls, golf bays, and multi-sport cages. Below, we’ve presented visit per location data for the 12 Dick’s House of Sport locations currently open versus Dick’s chainwide average since the beginning of 2023. The strong visits per location trends that we identified last July continued into the back half of 2023 and early 2024, with House of Sport locations now seeing significantly higher visits per location compared to the rest of the chain. For reference, the average Dick’s Sporting Goods store is roughly 50K square feet square feet compared to 100K-120K square feet for House of Sport, indicating that House of Sport is also outperforming on a visit per square foot basis.
Another example of “going big” can often be found in tourist hotspots like Las Vegas or New York. We wrote about how CPG companies like Coca-Cola and M&M’s are smelling sweet success by letting visitors immerse themselves in a brand with unique life-size statues or limited-edition products.
One category flying under the radar with sizing up? Convenience stores. While one normally pictures c-stores as smaller, drop in-and-out locations, certain brands are making a trip to a c-store a destination in itself. Take Buc-ee's as an example. With its famous peanut butter fudge balls known as Buckeyes and the super-cute beaver mascot, this c-store has diehard fans who will drive miles out of their way to visit. In Q1 2024, Buc-ee's success was largely fueled by families and weekend visits.
Migration is Altering Expansion Plans for Many Retailers
One of the factors driving retail chains to adopt smaller format stores is migration. As we’ve pointed out in the past, a number of retail and restaurant chains have been looking to smaller markets to augment their growth strategies. Below, we’ve also presented a map from Placer’s Migration Trends Report below showing population percentage growth from March 2020 to March 2024 at the market level. Green dots represent markers that have seen permanent population growth, while red represents markets that have seen population declines. From this map, we see strong increases in the populations of many smaller markets across the U.S.
We’ve previously looked at how the movement to smaller markets has changed the complexion of the home improvement retail category (and how Lowe’s plans to counter these changes). We’ve also looked at how smaller markets are critical for Chipotle’s future growth strategies and how migration is changing the face of markets like Boise. At a time when it’s more expensive for retailers to operate physical stores due to higher interest rates, higher rent costs (especially among A malls properties), minimum wage increases and labor scarcity, retailers are looking for any way they can to maximize the returns on their store properties, including retail media networks, store-in-store partnerships, and co-branded stores. However, in addition to generating more revenue from ancillary services like advertising or store-in-store partnerships, it’s clear that smaller markets–where many retailers have seen higher visit per location trends the past two years–have become an increasingly attractive option to generate higher returns on their store investments.
