For the past year, retailers have been not so secretly worried that the current unprecedented two-year run of robust comp store sales will run out of gas sooner rather than later. And if that moment comes, merchants are particularly concerned that the added expenses they’ve incurred since COVID-19 first impacted their businesses in March 2020 will make it even harder to climb back to normalcy.
That moment may be coming quicker than many had predicted. A Brick Meets Click/Mercatus Grocery Shopping Survey shows that online sales declined 4.5 percent compared to e-commerce revenue amassed in December 2021. According to the Barrington, IL research firm, U.S. online sales totaled $8.5 billion in January 2022, down from $8.9 billion the previous month. This January’s online sales numbers also showed a significant dip from that of January 2021 when e-commerce (defined as home delivery, curbside pickup and ship-to-home initiated by the retailer and third-party services like Instacart and Shipt) reached $9.3 billion.
However, I tend to not give as much weight to e-commerce sales from 12 months ago because at that time very few Americans had been vaccinated and in-store visits were also less frequent.
But the most recent two-month comparison is of some concern since in-store visits have not appreciably changed during that period and the effects of the omicron variant presented a major public health factor in both December and January. Other Brick Meets Click statistical comparisons were not as stilted as overall sales, however. The number of households that made online grocery purchases remained steady at 69 percent during those two months.
When comparing the past 12 months, only the curbside pickup portal experienced a sales gain (of 2.5 percent) while ship-to-home revenue (FedEx, UPS) dipped nearly 20 percent and home delivery sales volume decreased 6.3 percent.
“These sales results show that circumstances connected to COVID continue to disrupt the way people shop, but in different ways than earlier in the pandemic,” said David Bishop, partner at Brick Meets Click. “Increases in COVID case rates no longer have the same effect on buying patterns due in part to progress with vaccinations. The loss of financial assistance is another factor since the economic impact payments and child tax credits that many households received in 2021 have ceased. And, if that’s not enough, many retailers altered store operations in January to address the labor shortages associated with COVID-related absences and a tighter labor market.”
I’m aware that if I were in a debating contest about this topic, I’d probably lose. That’s because the visceral evidence indicates that sales are as healthy as they’ve ever been despite a highly flawed and dysfunctional supply chain that has been impacted by labor shortages, the unavailability of raw materials and commodities, significantly higher wages and spiraling inflation.
Even with many retailers currently operating with service levels in the 70 percent range, comp store sales continue to thrive, breaking records set only a year ago when most merchants described the boom as being temporary.
Based on the empirical data, “temporary” no longer means short-term. Or as described by the president of a large regional chain based in the Mid-Atlantic: “People are still buying everything and anything they can. I can no longer explain why, but the evidence, even with major out-of-stock issues, speaks for itself.”
Later in the conversation, I asked that same executive if he sees a brick wall ahead. “Certainly, I do. We all do. It’s inevitable. These price increases are significant and seemingly endless. At some point, virtually all of our customers, even our most loyal ones or those that don’t place a premium on price, are going to take notice and change their buying habits. Some of these problems will certainly abate in time, especially pricing which I expect to flatten and then decrease slightly – but can anybody guess when that will be? When will the labor pool return to a more normal state? At the end of all of this, will there suddenly be more truck drivers available? More clerks who want to work in our stores? More forklift drivers who want jobs in our warehouses, even at almost $25 an hour? Who knows? We’ve incurred expenses that are now permanent. Wages increases are not going to be rolled back. Some of the safety protocols that we’ve implemented are expensive and here to stay. I saw that Ahold spent more than $1 million a day for COVID-related costs last year [more on that later in this column]. Some of our new costs are now fixed. I’m not complaining because our sales have been strong, but that’s also come at a non-monetary price when you consider the devastation that COVID has caused. Enjoy the good times now because they won’t last that much longer.”
Other retailers feel very much the same even if they aren’t as vocal as that.
Ahold Delhaize Beats Analysts’ Predictions With Strong Q4 Comps, E-Commerce Growth
Ahold Delhaize continued its strong sales performance with increases in both comparable store sales and e-commerce revenue in its fourth quarter which ended January 2. At its 2,048 U.S. stores (The Giant Company, Stop & Shop, Giant/Landover, Hannaford and Food Lion), comps rose 4.8 percent (excluding fuel) and e-commerce business grew 30.5 percent in Q4 to $985 million. A large part of that gain came from FreshDirect, the online grocery retailer Ahold Delhaize acquired in early 2021. Once again, the top U.S. brand performer was Food Lion, which posted its 37th consecutive quarter of comp store sales increases. The Salisbury, NC brand also acquired 71 former Bi-Lo stores from Southeastern Grocers last year, the largest acquisition that the Zaandam, The Netherlands-based retailer made in 2021.
“We ended 2021 on a strong note, with positive group Q4 comparable sales momentum and stable group margins, positioning us for a strong start to the next phase of our ‘Leading Together’ strategy announced last November [at the company’s Investor Day],” said chief executive Frans Muller. “Looking back on the past year, I am most proud of how associates brought our values to life in the way they responded to ongoing developments associated with COVID-19 and natural disasters throughout our brands’ markets, including major floods in Belgium, tornadoes in the Czech Republic, fires in Greece and Hurricane Ida in the U.S. Through it all, associates rose to the challenge to care for customers and communities. As a result, we enter 2022 with deeper relationships and trust across our brands’ markets and stronger market shares to build upon.”
Earnings-wise, Ahold Delhaize had a solid, not spectacular, year. Underlying operating income increased in Q4 2021 by $30.7 million to $953 million. Part of that number included a fourth quarter restructuring gain of $161 million resulting from the reassessment of the FELRA and MAP single-employer pension plan obligations in the U.S. (reworked pension plans at Giant Food and Stop & Shop). In Q4 of 2020, Ahold Delhaize said that similar labor-related charges cost the company $956 million in the U.S.
Muller also noted that his company spent more than $1 million per day in COVID-related costs during 2021. Included in those expenses were health and safety measures and additional paid quarantine leave for local brands’ associates in the U.S. Also included in that total was about $225 million in charitable donations to support the communities where the international retailer operates stores.
‘Round The Trade
Since it’s been the number one topic we’ve discussed over three past few months, here are a few updated inflation stats. For January 2022, overall grocery prices increased 7.4 percent year-over-year, according to the Bureau of Labor Statistics, the highest jump in 40 years. More specifically, prices rose 1 percent when just comparing December 2021 to January 2022. And several categories even exceeded the 7.4 percent overall grocery level including bacon (up 18.1 percent), fats and oils (10.7 percent gain) and coffee (up 8.2 percent). Meat prices (measured as a whole department) continued to rise over the past 12 months, increasing 12.2 percent during the January 2021-January 2022 measuring cycle. Don’t expect much improvement anytime soon.
Interesting dialogue held earlier this month between UNFI CFO John Howard and Neel Kashkari, president and CEO of the Federal Reserve Bank of Minneapolis. Kashkari, a former rocket scientist, has led the Treasury’s financial agency since 2016 and discussed such relevant issues as supply chain and labor. Here are some highlights: when asked about whether “The Fed” could help solve the supply chain problem, Kashkari stated: “Not directly. There are two issues going on as I read it with supply chain. One is just the things that are gummed up because of the lack of workers, and COVID, etc. But the other thing is demand is very high right now. In some cases, demand is exceeding pre-COVID demand. So, it’s not simply that supply chains are gummed up because of COVID, demand is far exceeding what they were demanding before, and supply simply has not been able to meet that higher level of demand. We can do something about that part. So, the way monetary policy works, we can soften demand by raising interest rates and by tightening financial conditions. That can help alleviate some of the excess demand, but that’s not going to do anything to deal with, ‘Hey, the ports are jammed and packed because there’s not enough workers, or a factory in Asia is shut because of a COVID outbreak.’ There’s nothing that we can do about that. But the demand side is something we do have the tools to help address.” When Howard inquired about what is driving the 3 to 4 million people shortfall in labor right now, Kashkari explained: “It’s a complicated question. If we’d had this discussion a year ago or nine months ago, I would’ve pointed to a few factors. I would’ve said we know that there are these enhanced unemployment benefits that if they are not creating an incentive not to go back to work, then giving people the option of saying, ‘Hey, maybe I’ll just wait for a little while before I go back.’ Schools were shut, and then, of course, there was the fear of the virus. Well, those enhanced unemployment benefits are long gone. We saw no uptick in the data that all of a sudden, there’s this big surge of labor supply. Schools are mostly reopened, but a lot of families are experiencing what my family just experienced, which is, ‘Yeah, they’re open. My daycare was open, but my two children were out of it for three weeks, which had an effect on our ability to work.’ We also see some people who’ve retired early as a result of the pandemic. It seems like it’s a mix of different factors from people caring for family members, either children or parents, as an example, or a sick relative. People who are still afraid of the virus. You had the delta wave. Now the omicron wave, and hopefully that’s behind us. Hopefully, people will feel more confident to go back into those in-person areas. That’s another factor, and then, retirees. I mean, I’m optimistic. I think one of my lessons prior to the pandemic was that the vast majority of people want to work. If they can get a decent job at a decent salary, they want to work. And even people who we thought were retired, in many cases, they came back, and they said, ‘You know what? Maybe I’m not going to work 40 hours a week, but I’ll work 20 hours a week.’ And maybe things like Zoom will make it easier for people to work from where they live in some type of hybrid environment. So, I’m optimistic, but I think it’s going to take a while longer than I had hoped. In the last recovery, after the financial crisis, it took 10 years to put everybody back to work. Now, I sure hope it doesn’t take 10 years this time, but it seems like it’s going to take more than two to get everybody back. When Howard asked how interest rates will impact and affect the time horizon on the inflationary environment, Kashkari responded: “Well, we focus on inflation. We look at a lot of different measures, other than inflation, as you might imagine. I’m very focused on year-over-year measures of inflation. We can just do the math and look at when prices really start to move. If you have a one-time boost of prices, that’s painful for families who have to pay it, but that does not mean you have annual inflation year after year after year at these very high rates. So, most public sector, or most private forecasters, estimate that inflation by the end of this year would probably be around the 3 percent number. So, well below where we are right now. So, just the math of that suggests inflation should start coming down over the course of this year. Now, obviously, if supply chains continue to be disrupted or get worse, as an example, or if there’s another wave of the virus that keeps labor supply on the sidelines, we’ll have to reassess. But my guess is that by the end of this year, we’re not going to be back to our 2 percent target, but we should be well on our way back toward that. I mean, obviously I hope that is in fact the case, but we’re going to watch the data over the next six months to see, are we in fact headed in that direction?” So after watching the hour-long virtual call and being very impressed with Howard and Kashkari, my takeaway was that not even a high- ranking government official with a 30-pound brain has a real clue on when the labor shortages/supply chain problems will end.
Last month we gave you Kroger’s forecast for top industry trends and this month we offer a similar list from online grocery merchant FreshDirect (owned by Ahold Delhaize). The Manhattan-based e-commerce retailer expects fresh produce to boom, especially citrus products and berries. And much like Kroger, FreshDirect predicts sales from plant-based foods will continue to skyrocket, helped by more differentiated products being unveiled. Other trends include greater consumption of bold flavors (tahini, in particular, was cited) and an increase of sales of non-alcohol and low-alcohol sales (not sure about that one).
Local Notes
Just before presstime we received word that KeHe has been named the new primary specialty foods distributor partner for Allegiance Retail Services (ARS). The Naperville, IL-based national distributor will be providing support for the company’s members’ needs through data-driven information, store operations, and sales and promotional marketing. “We are confident that KeHE can serve Allegiance Retail Service members with excellent service, value, and industry expertise,” said Jennifer Mihajlov, VP-Southeast, and Midwest independent Sales at KeHE. “We are like-minded companies that share a commitment to optimizing the success of the independent grocer with first-to-market, highly-focused assortment, evolutionary marketing, and merchandising expertise while maintaining individual banner identity.” Mike Conese, VP-center store for ARS noted, “We are excited to pursue this partnership with KeHE Distributors. Allegiance Retail Services chose to work with the leading distributor in natural, organic, specialty, and fresh products, because of their profound understanding of this business segment, deep knowledge of independent retail stores, and expertise in trend analysis, which we believe will help us better serve our members.”