"It's really important to stay close to the consumer and not expect that past behavior as an indicator of the future." - Target 5/18/22
Flash call (KR, ACI, SFM)
We are hosting a grocery industry flash update call on Tuesday, May 24th at 12:30 PM ET.
We have been short the traditional grocers and think now is the time to press the shorts. During the pandemic, we moved from being long the grocers to being short, too early in hindsight. The variants of COVID-19 lengthened the pandemic restrictions which kept food at home consumption elevated. In the past weeks, consumer shopping behavior has shifted as the impact of inflationary price increases for food, fuel, and nearly everything else has hit the consumer while lower government transfer payments have removed support. The consumer has started to prioritize spending categories and there will be new winners and losers.
Target gains in food (ACI)
Target gained market share in food and beverage in Q1 with SSS growth of low double-digits. Over the last three years, food and beverage sales growth accounted for 25% of Target’s overall sales growth. Unit share gains were driven by Target’s store brands.
Gross margins contracted 430bps due to markdowns, inventory impairments, discretionary category actions, higher freight costs, supply chain disruptions, and higher compensation in its distribution centers. Management stated that they are expecting freight costs to increase an incremental $1B this year. Management said they felt good about gross margin performance in grocery.
The mass channel outperformed the grocery channel in 10 of the 13 weeks in FQ1 (WMT and TGT’s FQ1). The top line was not the problem for Walmart and Target, it was the margins. Both companies were confident about sales but heavy in inventories in general merchandise categories. With pressure in general merchandise categories, the mass retailers would seem unlikely to be aggressive in the food category.
Flying in baby formula (PRGO)
The Biden administration invoked the Defense Production Act to alleviate the infant formula shortage. Suppliers of infant formula ingredients are ordered to prioritize delivery to the manufacturers. The Administration also announced Operation Fly Formula which directs the Department of Health and Human Services and the Department of Agriculture to use Department of Defense commercial planes to import infant formula from other countries. It’s unclear how quickly the steps will increase the supply of infant formula (we are thinking weeks now, from months earlier), but the government will now be seen as helping instead of hindering. With this much government assistance the question may be how long will it take before there are excess supplies. Inventories may be in flux, but the Administration did not announce any structural changes to the infant formula market including removing tariffs or increasing competition.
