The pandemic era of greedflation in the grocery section is finally ending.
Consumers are fed up and showing it after two years of absorbing spiraling prices as retailers and food suppliers passed on the costs — and then some — of supply chain disruptions and rising commodities.
Kroger Co.’s earnings on Thursday were a sign of what’s to come. The company missed Wall Street’s estimate for revenue and beat on earning per share by the smallest margin since the beginning of the pandemic. Its stock sank. Increased promotions, inflation-squeezed consumers and economic uncertainty all featured during a call with analysts. But it’s hard to escape the fact that rival Walmart Inc. outperformed expectations on both metrics and made an unusual, early upgrade to its annual profit forecast just last month. So, what gives?
Consumers have become laser-focused on price, opting for discount stores, or passing up pricey brand name goods from companies such as Campbell Soup Co. and Kellogg Co. for lower-priced private label alternatives including from Walmart’s Great Value line and Costco Wholesale Corp.’s Kirkland Signature. The competition for squeezed consumer dollars is ramping up. Grocers and food suppliers that will flourish during this next phase of the country’s pandemic recovery will be those that figure out how to deliver quality goods — at competitive prices.
A quick look at pricing and volume trends for some of the big suppliers of packaged foods bears this out. Hefty prices increases from Campbell Soup, Conagra Brands Inc. and General Mills Inc. through 2022 were accompanied by contracting volumes, according to an analysis by Bloomberg Intelligence. Weaker demand and fading pricing power should increase promotional activity in the second half of this year, analysts Jennifer Bartashus and Diana Rosero-Pena wrote in a recent report.
Packaged goods providers funded much of the promotional activity that drove shoppers into its stores last quarter, Kroger’s Chief Executive Officer Rodney McMullen said Thursday. Companies such as Kraft Heinz Foods Co. and JM Smucker Co. are looking to sell specialized lower-priced products with dollar stores, which are ramping up their own grocery businesses.
Kroger and other grocers are under pressure to do more to compete with Walmart, which has said it is working with suppliers to lower prices “as fast as we possibly can,” and is being rewarded by shoppers and investors for its efforts. On Thursday, Kroger was grilled on its plans and said it’s investing in pricing, expanding its private label and modifying package sizes.
Sky-high prices are keeping people from going to the grocery store as often as they once did. Location analytics company Placer.ai has recorded year-over-year traffic declines every month since last summer. Instead of mid-price grocers such as Kroger, shoppers are heading to discounters like Aldi Stores Ltd. and Lidl Ltd. where traffic only started to slow month-over-month in April.
In response, grocers are ramping up their own lines of food products. In addition to Great Value and Kirkland, there’s Kroger’s Smart Way and Target Corp.’s Good & Gather. These offer the same, and sometimes exclusive, products at a lower price because grocers can control their marketing costs and who they contract to manufacture the goods. Often, private labels sit right with name brands on the shelf. So, a price-conscious shopper might check the price on a box of Kraft Heinz’s instant mac and cheese and find that Walmart’s Great Value alternative has similar ingredients at a lower price. More than 20% of Walmart’s sales are in private brand items and that figure is closer to 30% across Sam’s Club, Chief Financial Officer John David Rainey said at an investor conference Wednesday.
Signs of cooling inflation are trickling into the data. Food prices climbed 6.7% in May from a year earlier, the least since the end of 2021, according to government data, and down from the recent peak of 11.3%. But, over two years, it’s at more than 20%, Walmart has said.
This leaves companies in the grocery business with few options to compete for those stretched consumer dollars other than lowering prices, particularly as commodities ease, private labels muscle in and more retailers like dollar stores give supermarkets a run for their money. It’s still unclear whether prices will fall back to pre-pandemic levels. My bet is they won’t. But what is clear is that the pandemic party is over for grocers.
(Leticia Miranda is a Bloomberg Opinion columnist covering consumer goods and the retail industry. She was previously a business reporter at NBC News and a retail reporter at BuzzFeed News.)
