The Paradox of the Sudden Recession

The whiplash U.S. recession brought about by the COVID-19 crisis may eventually force conventional food retailers to get sharper on pricing to meet a consumer demand for value, but for the time being, their profits are soaring even as the price gaps between them and their everyday low-price (EDLP) rivals widen, two Barclays analysts said in a webinar this week.

This unusual combination of circumstances relate to trends going into the crisis, when conventional supermarkets riding a strong economy had moved to compete with their discount competitors in terms of freshness and experience over price, explained Karen Short, senior equity research analyst for Barclays. The sudden economic wreckage and food price inflation in recent months has been obviated to a degree by a massive volume shift from the shutdown of rivals in the restaurant and entertainment space, and a concurrent pullback in promotions, and that’s widened profit growth vs. EDLP operators such as Walmart and Aldi.

“I’m not totally sure we’re seeing a huge resignation as it relates to value—yet,” Short said during the June 11 event, hosted by The Food Institute. “Prior to going into the COVID-19 recession, what I started seeing from a conventional retail perspective was that conventionals were trying to emphasize the fact that they were fresh, and they were convenient, and they had a better offering than Walmart. So I think there had been kind of a psychology shift, well before COVID, to not necessarily be so competitive on price. There was this view that conventional operators didn’t need to match Walmart tit for tat, or within a certain price gap.”

For the time being, that’s meant outsized profit growth for conventional “high-low” operators, while EDLP players are feeling a margin sting, Short added.

“As an EDLP operator, your prices are your prices—you’re not doing anything about those so … lower price-point operators have actually seen their margins get squeezed because they've kept the shelf price, whereas a lot of the conventionals that actually just taken off the yellow sticker in terms of high-low promotional cadence, and you just go in with high," Short said.

Reduced waste as a byproduct of higher volumes, and a rebirth of branded goods have also played to conventional strengths, the analysts said.

“I haven't seen any value at all,” said Hale Holden, head of U.S. high yield research for Barclays, adding that the promotional shift during the crisis—in part, enacted to reduce incentives for shoppers to “stock up” during the crisis—helped them encounter more profitable sales “almost accidentally.”

While conditions have created a kind of “imperfect storm” for conventional food retail, industry observers anticipate that deflation will eventually arrive as food retailers prepare to defend the share they’ve gained. Short noted that a series of consumer surveys taken during the crisis indicate that “meaningful” increases in price gaps with discounters may be playing a role in diminishing loyalty to conventional retailers su ch as Kroger, while discounters like Dollar General saw consumer loyalty increase between March and April. Other factors, including the execution of online shopping options and capacity at stores, also influenced loyalty during the crisis, Short noted.