Grocery store sales decelerate (KR, ACI)

Grocery store sales increased 6.6% in January, decelerating from 7.4% in December. The two-year average decelerated from 8.2% in December to 7.7% in January as seen in the chart below. Food and beverage store sales decelerated from 6.8% in December to 6.2% in January.

On-premise establishments surged past eating and drinking at home in January. The 7.2% month-over-month increase in January was the largest monthly increase for the retail sales data. Food service and drinking places retail sales increased 25.2% in January, accelerating from 12.3% in December due to lapping the Omicron breakout last year.  Grocery store sales have been running up nearly half as much as food at-home CPI, reflecting the reduction in volumes. The gap between food inflation and grocery store sales growth (or volume declines) widened beginning in April.

Staples Insights | Grocery sales (KR), Inflation inflection (AD-AMS), Super Bowl (BUD), Departed(KR) - staples insights 21523

Inflation inflection (AD-AMS)

Ahold Delhaize reported Q4 underlying EPS of €.72 vs. consensus expectations of €.60. Total revenue grew 8.1% with constant currency revenue growth of 15.9%. Comps ex. fuel grew 9.3% in the U.S., accelerating from 8.2% sequentially. In Europe, comps ex. fuel grew 5.7%, decelerating sequentially from 7.4%. Online sales grew 5.0% and excluding grew 14.4%. Overall operating margins expanded 20bps to 4.4%, above consensus expectations of 3.8%.

In the U.S., constant currency revenue growth was 9.2% with online sales growth of 17.3%. The e-commerce penetration rate in the U.S. was 7.7%, up 50bps. Food Lion and Hannaford grew double digits and led banner performance. Operating margins expanded 40bps to 4.7%, with a one-time reserve adjustment adding 20bps.

In Europe, revenue grew 6.6% in constant currencies and comps grew 6.9% excluding Underlying operating margins decreased by 20bps to 4.0% with energy costs being a 50bps headwind. Energy costs were a 70bps headwind in the previous quarter.

Management said they see in the U.S. and in Europe a 2% point increase in private label penetration. Management expects inflation levels for the year to go down, but to be at elevated levels. Management’s conversations with manufacturers lead them to expect an increase in promotions to improve volume trends. Product availability was much better in Q4, but frozen potato products, baby formula, and pet food were called out as difficult.

Management guided 2023 EPS to be flat YOY due to the non-recurrence of one-time gains related to interest rates in 2022. Management expects inflation to remain elevated through the first half of 2023. Comps accelerated sequentially in the U.S., but management expects inflation to moderate. Kroger and Albertsons have different month ends, but consensus expectations for comp deceleration look premature.

Super Bowl draft (BUD, STZ)

Draft beer volumes grew 4.1% for the Super Bowl compared to last year’s game according to BeerBoard. Draft volumes increased 69% in Phoenix, the host city. Modelo Especial was the best-selling draft beer in Phoenix on-premise businesses. Bud Light was the top draft beer in the home cities of both teams in the Super Bowl. In Kansas City, overall draft volumes grew 5.7% while in Philadelphia they were flat. Nationwide Bud Light was the best-selling beer on draft, but volumes decreased by 10%. Michelob Ultra was second in draft volumes and had a 5% growth. Modelo Especial draft volumes grew 11.6%. Modelo has a low mix of draft sales because of historical reasons. 

Digital departure (KR)

Bill Bennett, VP and head of e-commerce at Kroger is leaving the company to become CEO of Innovative Food Holdings. He currently oversees Kroger’s $10B e-commerce business and the rollout of the Ocado-automated fulfillment sites. Ocado’s fulfillment capabilities, which are aimed at expanding Kroger’s retail distribution network beyond its physical stores, represent much of what is unique about Kroger’s digital strategy. Grocery e-commerce is transitioning from the growth stage to seeking better margins which may be playing a role in Bill Bennett’s transition.