Discount beating organic (GO, SFM)
Traffic trends as measured by Placer.ai have diverged between Sprouts Farmers Market and Grocery Outlet despite both chains having a high mix of stores in California. With elevated levels of food inflation, it seems natural that consumers would seek out savings at Grocery Outlet which prices its goods at 40-70% less than conventional supermarkets. Sprouts Farmers Market seeks to have lower prices than its competition, particularly in fresh produce, but organic produce industry wide is priced at nearly double the price of conventional produce. Referenced from January 1, 2021, Grocery Outlet traffic continues to gain, up 29.2% in the week ended December 18, while Sprouts Farmers Market traffic was down 19.5%. On a YOY basis, Grocery Outlet traffic was up 12.6% for the week ended December 18 while Sprouts Farmers Market was down 8%. We note that since the post-pandemic reopening, traffic patterns have been impacted by the number of people in the shopping household. Traffic patterns are best interpreted directionally and not as a direct reflection of the number of transactions. Grocery Outlet is on our Long list while Sprouts Farmers Market is on our Short list.
Baby formula tariffs (PRGO)
Tariffs of 25% on imported infant formula are scheduled to return on January 1. The tariffs were lifted in July to improve the availability of infant formula after shortages worsened due to the shutdown of Abbott’s Michigan plant. The U.S. tariffs and regulatory hurdles had kept the imported supplies below 2% of consumption before the plant shutdown. The dairy industry is keen for the tariffs to return. The National Milk Producers Federation wrote a letter to Congress last month that said, “We respectfully request your opposition to any effort to extend these preferential tariff benefits beyond the end of this year.”
Imports have helped alleviate the supply shortages. Last month one-third of U.S. households reported having difficulty finding adequate supplies of baby formula. The supply shortages are not fully behind us, which may make limiting imports an unpopular decision. Perrigo was not able to keep up with the demand for its infant formula and running its plants at full production led to higher costs. Perrigo recently purchased Nestle’s Gateway infant formula plant. The purchase and subsequent expansion will enable Perrigo to meet all its own production needs. The $170M acquisition and capex for the plant will contribute $50M in expected operating profit beginning in Q4. Despite the surge in demand in 2022, Perrigo’s infant formula business will grow ~75% in 2023.
Good Karma gets a boost (STKL)
Good Karma named Mike Murray the new CEO. Mr. Murray joins the company from Teton Waters Ranch, a regenerative beef producer. He has more than 25 years of CPG experience including with So Delicious Dairy Free and WhiteWave Foods. Good Karma is a plant-based milk producer. Good Karma completed a round of funding. The new funding will assist the company’s distribution growth plans as well as improve brand awareness. Good Karma recently launched a line of plant-based creamers called Barista Blends and a children’s nutrition beverage called Kids Oatmilk+. Dean Foods owned a majority stake in the company before declaring bankruptcy and selling off assets in 2020. The plant-based milk category continues to attract new investment. The combination of investment and innovation is helping the category’s share gains against the dairy industry which has been lacking a marketing answer to plant-based milk claims. SunOpta is a supplier to numerous plant-based milk brands. It is in the process of opening new capacity to keep up with the category’s growth.
