There is genuine retailer anxiety that grocery inflation will continue to rise (or at best, moderate slightly), supply chain functionality will improve (but will still be noticeable enough to create worry) and that shrink from theft will continue to be a growing factor.
Next month will mark the third anniversary of COVID becoming an historic societal disruption. That event has singularly changed many Americans’ mindsets and behaviors about how they now live their lives. It also changed the core economics of our society.
And while food retailers unexpectedly benefited from the tailwinds of the pandemic, and then 18 months later received another surprise topline boost because of skyrocketing inflation, many retailers believe 2023 will be a much more challenging year, especially in the second half.
Most merchants that we interviewed still feel positive about current sales trends entering the new year, but almost all cautioned that grocery inflation levels at or near current levels, coupled with a continued uncertain overall economy, will lead to flat or slightly negative sales beginning as soon as Q2 next year.
“We are all somewhat fearful of what lies ahead,” said one chain executive based in Pennsylvania. “We’ve witnessed trading down for the past six months and I expect that even our most loyal and economically able shoppers will increase their budget watching. And what happens when people go beyond trading down – spending less? I don’t think any of us have a solution for that. We may not officially end up in a recessionary cycle, but many people think we’re already there. It’s still very early, but I don’t believe we will experience the same level of holiday sales and earnings this time next year.”
While most retailers believe that supply chain issues have improved over the past six months and predicted that improvement will continue into 2023, all of those we polled remained concerned that functionality and cost are still having a significant effect on the entire shopping experience.
“It would be impractical to think that service levels and the costs of managing supply chains would be near pre-COVID levels,” said a Maryland-based independent retailer with four stores. But what we’ve seen over the past three years in terms of product availability, coupled with the cost of getting a product from manufacturing/processing plant to our shelves, has been unfathomable and arguably the major reason for food price inflation. We’ve seen product availability increase over the past 90 days and I expect supply channels will function better in 2023. But what does ‘better’ actually mean? That in-store service levels are at 85 percent rather than 95 percent? That a load of product shipped from California costs $25,000 now, which is about double from 2019? I guess that’s improvement, but we will need to increase service perceptions with our customers when we have most of the tools at our disposal and costs have to come down a bit more.”
As long as I’ve been writing about the grocery biz (this is my 50th year), shrink has always been a critical issue. But those concerns have primarily centered around inventory-related loss, not about theft. That’s all changed since COVID came to town, and as retailers told us, loss from theft is getting worse.
According to David Siegel, CEO of America’s Food Basket, which is comprised of about 60 independent retailers in the Mid-Atlantic and Northeast, “Theft is a significant issue. Being strategic about product placement, a reinforced local police department presence (where and when appropriate), ensuring your associates are aware of the issue and making sure video and other surveillance equipment is in good working order is key. Taking advantage of key theft reduction tactics (use of baby formula kiosks, etc.) and a positive relationship with your local law enforcement is also necessary.”
To sum it up, retailers remain cautiously optimistic that some key economic metrics will improve, but their level of skepticism remains higher than usual, even for a group of businessmen for whom cynicism is ingrained in their DNA.
‘Round The Trade
Instacart, which is due to go public any decade now, has once again cut its valuation by 20 percent to approximately $10 billion, a far cry from the $39 billion “on paper” market cap it was touting 11 months ago. Sure, the financial markets are not in strong shape currently (which is the likely reason the San Francisco-based online grocery delivery company hasn’t yet launched its long-awaited IPO), but I’m not alone in the belief that there are a lot of holes in Instacart’s business model, and that its value could decline even further as more and more grocers find third-party delivery solutions that don’t include outside vendors…in its latest report, which at presstime was released in mid-November, the Bureau of Labor Statistics (BLS) provided some overall slightly encouraging news for consumers – not counting still-rampant food price inflation. According to the most recent Consumer Price Index (CPI), that relief came in the form in more encouraging inflation news with a 7.1 percent year-over-year gain (the smallest increase in a year). However, food-at-home purchases were still at unacceptable levels – 12 percent higher than a year ago. The BLS said three of the six grocery store indices were more expensive when looking at a 12-month comparison. Those include cereal/bakery products (+16.4 percent); dairy (+16.4 percent); and fruits and vegetables (+9.7 percent). And while the other three categories – other food at home (+13.9 percent); non-alcoholic beverages (+13.2 percent); and meat/poultry/seafood/eggs (+6.8 percent) – dipped slightly from October 2022, they still were near 40-year highs…on the digital front, according to Brick Meets Click/Mercatus, total U.S. online grocery sales continued to decline in November, dropping 10 percent from a year ago. This marked the fourth consecutive month that digital grocery revenue was decreased. According to the digital research firm, the number of households making online purchases also dipped by 7 percent compared to November 2021. Their data shows that mass merchants are clearly outpacing supermarkets as digital orders at Walmart and Target jumped 8 percent among monthly active users (MAUs) when compared to an 11 percent drop among grocery MAUs. The survey added that the cross-shopping rate between grocery and mass went up 6 percent on a year-over-year basis. “When it comes to shopping online – especially for delivery or pickup – cost considerations include more than the price paid for a basket of products. Many customers must evaluate the total cost associated with using the service, which can include special charges, standard fees and tips. And when comparing the total of these costs to the customer, there’s a sizable gap in favor of mass versus grocery said David Bishop, partner at Berrington, IL-based Brick Meets Click. Sylvain Perrier, president and CEO at Mercatus, which is based in Toronto, stated that grocers might consider a tiered fee structure for price-conscious digital shoppers. “We know that if offered the choice between shorter cycle times and lower fees, a significant share of online customers will select a time later that day or even the next day to save at least a couple of dollars,” Perrier explained… one merchant that has dominated comp store increase levels over the past year has begun to see things slow down a bit. Costco, whose fabulous sales run actually began in 2020, found that its comp store revenue in November slowed to a still very healthy 6 percent in the U.S., down from 9.2 percent a month earlier. As an analyst, I wouldn’t be too concerned…while retailers can unflinchingly tell you that dollar sales are up and units are down, they would also note the significant increase in “own brands” sales. To wit: recent empirical evidence in the form of a new report from IRI about private label (“Private Brands: Look Who’s Buying Now”) indicates that ACV sales of private brands has increased 17.5 percent in the past year… Doug McMillon, who in early December criticized center store-driven manufacturers for their inability or unwillingness to attempt to stabilize prices (when compared to other Walmart suppliers), doubled down on those thoughts at the Hope Global Forum in Atlanta a couple of weeks later when he stated: “What we’re seeing is that if you take the fresh food categories, commodities, things like proteins, things are starting to move. Chicken right now is more expensive, but beef is down. Fruit and vegetables are in pretty good shape. But dry groceries, consumables are where we’re seeing the most stubborn and persistent inflation, mid double-digit inflation. And we’re not hearing from our suppliers looking forward that’s going to come down soon.”
Local Notes
As the new year rolled in, Virginia residents got some relief as the state’s inane and archaic grocery sales tax has been reduced from 2.5 percent to 1 percent for most food products. Exempted items (that will still be taxed at the old rate) include the usual “sin” categories of alcohol and tobacco as well as prepared packaged hot foods that are sold in-store. The Old Dominion is one of 13 states that still taxes groceries…Rite Aid has begun to open smaller physical stores to serve pharmacy “deserts.” The first two stores include a 3,000 square foot unit in Craigsville VA that opened in November, followed by another rural Virginia store early last month in Greenville, which was slightly smaller. Both stores are located in Augusta County. The third pilot store will also open in the Old Dominion in Scottsville (Albemarle County) in a few weeks…while ribbon cuttings at conventional supermarkets and Walmart are diminishing, that’s not the case with grocery discount stores. Last month, a new Grocery Outlet store opened in Mechanicsburg, PA and Aldi will open its second store on York Road in Cockeysville, MD, likely sometime in late 2023 (Aldi’s other unit is about 2.5 miles south in Timonium). In other Baltimore County news, legislation has been introduced that, if approved, would ban plastic bags from retail stores and would require retailers to impose a 10-cent charge on each paper or reusable bag issue at checkout. Baltimore County Council members Izzy Patoka, David Marks and Mike Ertel, who introduced the bill, are hoping for a November 1 implementation…the ultra-fast grocery delivery sector continues to shrink. Gorillas, the German startup which entered the U.S. in 2020 (NYC), has been acquired by rival Getir which operates in three U.S. cities – New York, Boston and Chicago. The selling price was $1.2 billion and the deal eliminates another competitor vying to significantly penetrate urban U.S. markets with 30-minute grocery deliveries. Both Gorillas and Getir laid off a significant number of employees last year; other ultra-fast merchants such as Jokr, 1520 and Fridge No More have either folded or exited the U.S. With the Gorillas purchase of Getir, founded in Turkey, it should be able to better compete with Gopuff, which has also experienced challenging issues in these post-pandemic, inflationary times. As one of my industry cohorts said: “These companies are only as strong as their next round of private equity financing.”…Village Super Markets, the second-largest ShopRite operator (and only publicly-traded Wakefern member) posted solid comp stores sales and excellent earnings in its recently completed Q3 ended October 29. The Springfield, NJ-based merchant, which operates supermarkets in New Jersey, Pennsylvania, New York and Maryland, increased its overall sales from $494.2 million to a record $519.7 million and posted a comp-store revenue gain of 4.3 percent. On the earnings ledger, profits increased 51 percent to $11.1 million. During its third quarter, the high-volume retailer converted and remodeled its Pelham, NY store from a Fairway Market to a ShopRite and opened its fourth Gourmet Garage specialty unit on Hudson Street in Manhattan…we have a few deaths that occurred over the holiday season to report. I was upset to hear about the passing of Ron Carkoski, 69, former CEO of the Four Seasons family of companies from 2002 until 2018, when he retired. He first joined the Ephrata, PA-based produce distributor in 1994 as director of procurement. Ron was such a wonderful person. Kind and generous with a tireless work ethic, he was one of the few people who I’ve met in this business that I would call a savant. Not only did he know the “Xs & Os” of the produce business, but he also carried himself in such a selfless manner, that after an hour with Ron you’d always feel better about yourself. Of course, my business sessions with the native Wisconsinite never filled a full hour. After about 20 or 30 minutes, the discussion would switch to music (he was a music teacher before shifting to the wholesale business) or sports, specifically his beloved Green Bay Packers. When the Renaissance man received the United Fresh Produce Association’s Lifetime Achievement Award in 2019, the man who hired him, David Hollinger, chairman and founder of Four Seasons, extolled Ron this way: “You always left us smiling chuckling, uplifting us, listening – you led with strength, you led with inspiration in the good times and challenging situations, and you always maintained a high level of integrity. Be assured that your friends at Four Seasons Family know you best after working with you for 24 years, and we understand just how deserving you are of this award.” High praised, all of it deserved…Angel is now with the angels. Stuart Margolin, the character actor who played one of the most memorable supporting roles in a TV series – “The Rockford Files” (1974-1979) – has arrived in the actor’s wing inside the pearly gates. Although Margolin appeared in 123 film and television roles, his iconic role as the sweet talking ex-con Evelyn “Angel” Martin, who served as Jim Rockford’s (James Garner) sidekick and sometime alter ego, was especially notable, earning Margolin two Emmy awards. During his 61-year career, Margolin actually had a number of memorable roles. He appeared in two Charles Bronson movies – “The Stone Killer” (1973) and then “Death Wish” (1974), a less than stellar flick that for some reason held my attention. I first remember seeing Margolin in the World War II action flick, “Kelly’s Heroes” (1970), another film that held me captive. That WW II action/comedy featured one the greatest casts of all time including Clint Eastwood, Telly Savalas, Don Rickles, Carroll O’Connor, Donald Sutherland, Gavin MacLeod and Harry Dean Stanton with Stuart Margolin as Private Little Joe who reported to Sergeant Big Joe (Savalas). A talented and funny man, Stuart Margolin was 82 when he passed…arguably the greatest female TV journalist of all time has passed away – Barbara Walters, 93, who started her career in the early 1960s as a writer and researcher with “NBC’s Today Show.” Within a year, she switched positions and became a reporter for the long-running morning show. By 1974, Walters was named the first co-host (with Hugh Downs) of “Today.” Two years later, she moved to ABC, where she became the first woman to co-anchor (with Harry Reasoner) a network evening news broadcast. During her career at ABC, her groundbreaking interviews included such world leaders as Menachem Begin, Anwar Sadat, Boris Yeltsin and Fidel Castro. In 1997, Walters added another project to her resume when she helped create and co-hosted “The View,” an all-women free-form discussion show. And while Walters retired from “The View” (and from broadcasting) in 2014, the daytime show continues to this day. Walters was also known for her wry sense of humor. When the late Gilda Radner, who spoofed Walters on “Saturday Night Live” first met Walters at a party in New York City in the late 1970s, Radner recalled being very nervous as she was introduced to the iconic journalist. “Hi, nice to meet you, I’m Gilda Radner.” Walters retorted, “Hello, I’m Baba Wawa”…from the world of sports, we lost two Hall of Fame (HOF) athletes. Pele, one of the greatest soccer players of all time, who was literally the face of the sport for more than 50 years, passed away late last month in his native Brazil at the age of 82. Born Edson Arantes do Nascimento, he became an overnight celebrity in 1958 at the age of 17 when he led his country to the World Cup. During the tournament, the youngest player in the entire field scored six goals and wowed sold out crowds with his remarkable creativity and athletic prowess. His final game was in 1977 as a player for the North American Soccer League’s New York Cosmos, where he spent three seasons after coming out of retirement at the age of 34 for the purpose of helping to popularize soccer in the U.S. All told, in his 21-year career, Pele scored 1,283 goals in 1,367 professional matches, including 77 goals for the Brazilian national team which led to three World Cup championships…I was also sad to hear of the sudden death of NFL HOF player Franco Harris, who left us late last month at the age of 72. His death occurred only a few days before the 50th anniversary of the “Immaculate Reception,” which was one of the greatest and freakiest plays in the history of the league. To recap: with less then 30 seconds to play in the fourth quarter of a divisional playoff game, Steelers quarterback Terry Bradshaw heaved a desperation pass to fellow running back “Frenchy” Fuqua. The pass was deflected by Raiders linebacker Jack Tatum in the direction of Harris, who scooped the ball just off the ground and ran for the game winning touchdown. Ironically, the Steelers had scheduled a special celebration commemorating the play at halftime during the Sunday Night Football game on Christmas evening. Harris was much more than the focus of one great play. He was an All-American at Penn State and a first-round draft choice by the Steelers in 1972. That same year, he was named NFL Rookie of the Year and during his 13-year career, which ended in 1984, he left as the third leading rusher in league history with 12,120 yards. Harris was a four-time Super Bowl winner and was elected to the Pro Football Hall of Fame in 1990. He was also active in many charitable and philanthropic efforts in his native Pittsburgh. I got to know Franco Harris in the late 1990s when he and fellow Penn State teammate (and former Baltimore Colts star) Lydell Mitchell acquired Parks Sausage, from the Parks and Haysbert families. While he was a bear of a man, Franco Harris was a gentle and kind soul and was genuinely interested in improving people’s lives. He will be missed…and finally, another death of sorts to report. A couple of months ago, we reported about another round of Sears’ closures nationally, an ongoing story for nearly 20 years. At that point, there were but 21 Sears stores remaining and only one in Maryland, the company’s large unit located inside the cavernous Francis Scott Key Mall in Frederick. I’m here to report, that death came quickly as the store closed earlier this month. BTW, owner “Slow Eddie” Lampert’s other retail enterprise, the once mighty Kmart is down to three stores. “Slow Eddie – the man with the reverse Midas touch.
