Grocery inflation (KR)
In the latest Consumer Brand/Ipsos survey, 72% of respondents said grocery inflation was having a significant impact on their household budget. Only 6% said it was not having an impact. Consumers have changed their spending with nearly half reducing their driving, travel, and entertainment, and large purchases. Only 35% made cuts to their grocery shopping.
Consumers have shifted the blame for grocery inflation since the last survey conducted in February. The pandemic saw the largest drop in blame from 30% to 19%. President Biden’s policies are now blamed by most people at 29% from 27%. The supply chain is blamed by 27% of respondents, up from 21%.
The blame game is often backward-looking, so we don’t spend much time on it. The caveat is if CPG companies are seen as responsible by consumers, price elasticity would be impacted. 'Companies looking to profit' as the responsible reason remained at 16% in the surveys conducted in February and in June.
Celsius joins Pepsi’s network (PEP, CELH, MNST)
PepsiCo announced a $550 million investment in Celsius Holdings as part of a long term distribution agreement. Celsius’ U.S. distribution will transition immediately from a mostly Anheuser-Busch network to Pepsi’s best in class network. Pepsi’s investment at $75 per share equates to an 8.5% stake in the energy drink company. PepsiCo wasted little time after the exclusive distribution agreement with Bang Energy ended in June. PepsiCo has made it clear that the energy drink category is one of importance with the purchase of Rockstar in 2020. For Monster Energy, Celsisus’ improved network and its partner are small negatives. As the energy drink market continues to expand, we have expected more entrants. We also assigned a very low probability to a PepsiCo and Monster Energy tie-up.
Publix signals an inflection in margins (ACI)
Publix reported SSS of 7.8% for the quarter ended June 25, decelerating from 11.7% sequentially. Management attributed the increase to mostly inflation. Total sales grew 9.3% and net earnings fell 2.7% YOY. Gross margins contracted 130bps in Q2, widening from -40bps sequentially due to inflationary costs that were not passed on to customers. Operating and administrative expenses leveraged 30bps. Operating margins contracted 100bps.
Publix operates ~1,300 grocery stores in seven states in the Southeast. Publix's gross margins showed the largest contraction in Q2 for the companies that have reported. We have been highlighting that as in-stock levels have mostly returned to pre-pandemic levels, there would be more pressure on grocery gross margins. As a non-publicly traded company Publix has been the first to signal an inflection in gross margins. Publix shares are not publicly traded, but employees can purchase shares. The company said the share price fell from $14.91 to $13.84.
Another loan (APPH)
AppHarvest announced that it secured $50M in loans guaranteed by the USDA. Some of the proceeds will be used to pay back an existing $46M loan. AppHarvest has found capital to fund its expansion readily available. That may be part of the long-term problem with numerous competitors looking to open indoor grow facilities with no competitive moats.
