White Knight? (ACI, KR)
According to Bloomberg C&S Wholesale Grocers, with backing from SoftBank Group, is in talks to buy divested stores from Kroger and Albertsons. Having a buyer with a strong balance sheet for the stores the two grocers have to divest in order to win regulatory approval removes one of the largest hurdles. Kroger and Albertsons have been planning on selling 250 to 300 stores in the regions with the most overlap – primarily the West Coast, Phoenix, and Chicago.
C&S Wholesale Grocers is the largest private grocery distributor in the U.S. The company promoted its COO to CEO last month. C&S is a lot larger than Haggen, which acquired 150 divested Albertsons and Safeway stores only to go bankrupt. C&S has been opportunistic in the past by acquiring grocery stores out of bankruptcy, stores that were divested for merger approvals, or discounted stores then selling them later while retaining them as wholesale customers. Albertsons is on our long list as we think the risk/reward is favorable for the merger approval.
Rebuilding the herd (TSN)
The U.S. beef cow herd to start the year was at the lowest level since 1962 at 29.4 million head, down 2.6% YOY. The herd continues to shrink with the estimate for July 1 feeder cattle supply down 3.6% YOY. Most agricultural economists now expect the rebuilding of the herd will not start until Q2 of 2024 or later. Beef heifers held back as cow replacements are the lowest in 50 years. The August Ag Economists’ Monthly Monitor expects massive consolidation in the cattle industry among producers and meat processors. In the past month prices for lightweight calves and stockers under 600 pounds have increased 45% YOY while heavier feeder cattle prices are up slightly less at 37-40% higher. Cattle slaughter is down 3.9% so far this year and beef production has declined 4.9% YTD.
In most markets except for the U.S., there is softer consumer demand for beef and high inventory levels. In Asian countries beef was purchased anticipating a demand recovery from COVID lockdowns, but weaker demand has led to higher inventory levels. U.S. beef exports in Q2 were down 14% compared to last year. Higher prices in the U.S. will encourage imports and discourage exports. When the process begins of rebuilding the herd it will take three to four years and reduce the feeder cattle supplies, cattle slaughter, and beef production. That will be a tailwind for higher cattle prices for the next two years at least. Tyson's CEO has described the current environment as the most challenging in his 40-year career.
Best chicken sandwich (LANC)
According to Revenue Management Solutions, consumers are not too price sensitive over chicken menu options unless a price increase of 20% or more is implemented. 60% of consumers choose their chicken sandwich based on the product, compared to 21% on the brand, and 20% based on the price. Chick-fil-A’s chicken sandwich is still #1 with 25% of consumers preferring it. Popeyes is #2 with 20% of consumers preferring it. All generations voted Chick-fil-A as the #1 chicken sandwich, but not every region. Chick-fil-A led in the South and Northeast while Popeye’s led in the West and Midwest. Chick-fil-A also was #1 in consumer preference in chicken nuggets at 28% while Popeye’s was #2 at 23%.
Chick-fil-A represents a total of 26% of Lancaster Colony’s sales, up from 24% in F2022. Lancaster Colony’s revenues grew 8.7% last year, Chick-fil-A sales represented half of the company’s revenue growth. Lancaster Colony is the best way for public shareholders to participate in the growth of Chick-fil-A.
