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Economic picture looks tough for grocery shoppers and retailers
Fresh Perspectives: At Groceryshop, Wall Street analyst Karen Short sketched out the business environment going into next year.
6 Min Read
Short said at Groceryshop that economic and business conditions will remain difficult for grocery consumers and retailers to navigate. / Photo by Russell Redman
More of the same uncertain, unstable conditions—though improved—appear to be in store for the grocery sector going forward.
Heading into 2024, grocery retailers can expect to make ongoing price investments and adjustments to help customers grapple with a difficult consumer environment, star Wall Street retail analyst and former Credit Suisse managing director Karen Short said this week at Groceryshop 2023 in Las Vegas.
Many shoppers remained financially squeezed as pricing for food and groceries and other nondiscretionary and discretionary goods remain elevated, draining the savings they built up during the pandemic, Short explained in a session titled “Consolidation, Inflation and Other Trends Shaping Grocery.”
What’s more, the budgetary pressure stands to push more Americans into the Supplemental Nutrition Assistance Program (SNAP) at a time when an enhanced monthly benefits payout has lapsed, she noted.
Consumers getting crunched
“To go over the state of the consumer, there’s a lot of talk as to whether or not there actually is a buffer in savings rates. A lot of different banks have come out with their projections on how much more padding people have with respect to their bank accounts and checking accounts than they had pre-pandemic,” Short told Groceryshop attendees. “Well, the simple fact is a low-income consumer, first of all, doesn’t save and many are not bankable. So the data is not really even remotely relevant. And I’m not sure what the real cut-off is on what is considered low-income, because if you’re a $75,000 household in combined income, I would consider that being very stretched. That customer is struggling today, and that customer is the customer for many of the people who are in this room.”
Consumer behavior at a several major retailers—in and out of grocery—is telling. More well-to-do shoppers are trading down, and these customers are helping to feed a private-label boom, according to Short.
“I’m going to deviate a little bit from grocery, but this is relevant. First of all, for Home Depot and Lowes, 40% of their customers own their homes outright. Of the 60% who don’t, 95% have fixed-rate mortgages. So they literally do not have a customer that is exposed to what’s happening with interest rates, and they are generally employed. And even Home Depot and Lowes are talking about the fact that they are seeing trade-down and or deferral on big-ticket projects,” she said.
It's not news that private brands have been on the upswing amid high inflation. Yet a private-brand boom at Walmart has been eye-opening.
“The second thing is I would point to is, in my 25-year career, I have never seen the private-label explosion as a percent of sales that Walmart is seeing. And there is a nuance there from the perspective that Walmart is a better operator today than they might’ve been in past recessions, and they have much stronger brand equity. So I think that’s helping,” she noted. “But Walmart is also most definitely calling in the fact that they're getting a trade into their formats from higher-income demographics. But I’ve never seen the increase in private label that Walmart has now been reporting for several quarters. And I think that’s just a function of the fact that the consumer is stretched.”
More SNAP participants, smaller benefits
Today’s financial pressure on consumers also surfaces in rising SNAP participation but reduced benefits, Short pointed out in her presentation. In pre-pandemic 2019, nearly 35.3 million Americans (17.8 million households) were SNAP benefit recipients. That climbed to an estimated 41.2 million (21.6 million households) in 2022 and is projected to reach 43.5 million people (22.5 million households) in 2023.
During that time span, the average monthly SNAP benefit rose from $129.54 per person ($256.19 per household) in 2019 to a high of about $237.29 per person ($452.26 per household) in 2022 before dropping back to $190.38 per person ($367.43 per household) in 2023.
“The year over year change, we’re down 15% in total benefit costs. The average daily benefit per person is actually down 20%. And then on top of the SNAP pressure, we obviously all know we have food inflation, we have gas inflation, we have rising rents and now we have student loan repayments,” Short said. “So I’ve been pretty cautious on the consumer for a while, probably prematurely. But now I think it really is happening, and it’s going to be much more of a struggle in general for retailers and the consumer, as all these things continue to build.”
Inflation declines, but conditions remain iffy
There has been good news on the inflation front, but looking ahead, it doesn't feel all that great.
In August, the Consumer Price Index inched up just 0.6%, mostly due to a jump in energy costs, and rose 3.7% year over year, essentially continuing at relaxed levels. Food-at-home inflation remains at a fraction of its year-ago level, up 3% annually in August and 0.2% month over month. A slide in Short’s presentation showed her prediction for the food-at-home CPI to fall from increases 10% in January to 0% this December, followed by negative numbers throughout 2024.
But she puts more weight on multiyear CPI figures in showing how inflation has been crushing consumers. Based on the latest reported CPI data in August, the food-at-home inflation level pans out at 15.5% over two years, 18.5% over three years, 22.6% over four years and 19% over five years. In the previous four years, the average grocery basket has swelled 18% from $269.28 in 2019 to $318.60, according to Credit Suisse analysis.
“The prediction for just one-year CPI is to be flat by December. What I think matters more is the two-year and three-year data, and then more importantly what a four-year number looks like,” said Short. “So versus 2019, those numbers are very high and are continuing to remain stubbornly elevated. Even if we end up at zero inflation in December year over year, you’re up 22% versus 2019 in theory. Again, just additional pressure for the consumer.”
In the meantime, the Produce Price Index (PPI) for food has declined faster than consumer food-at-home price inflation levels, with the weighted average entering negative territory in recent months.
“What matters is, in theory, as PPI goes down faster than CPI, you should have buffer on the gross margin for retailers, but that’s not happening,” Short noted. “Even though you have this dynamic, the margin is not actually increasing. It’s being pressured because there are a lot of pressures in the industry and retailers are having to invest in price.”
Unit sales have been weak but stand to improve as inflation eases off going into 2024, according to Short. Yet that portends other pressures, she added.
“Even though the margin situation has not been great for retailers, you actually have had weakness in units, which helps labor because you’re not actually having to process as many transactions. And even with that, you’re still not seeing much margin benefit,” Short said. “If you look at 2022, you have inflation astronomically high and units down. There’s some deception in that because people may trade up to larger pack sizes, so some nuances to that. In 2023, you’ll see units down less, but obviously the top line down less. And in 2024, maybe there is inflation, but units will be up. So that’s going to pressure labor from a transactional perspective. And I think that would turn 2024 into a pretty challenging year for a lot of retailers.”
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