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October PPI signals the end of lower COGS (KLG, GIS)

The PPI for food manufacturing increased by 0.6% YOY in October, accelerating 50bps from September. The two-year average accelerated by 50bps sequentially. The end of deflationary manufacturing costs is not a welcome development for food manufacturers, most of which have little ability to take price in 2024.

Staples Insights | Oct. PPI (KLG, GIS), Retail Sales (KR), Global wine production (NAPA)  - staples insights 111523

The PPI for breakfast cereal manufacturing increased 12.0% YOY in October, even with the growth rate in September. Rising production costs will keep prices higher (or boxes smaller) for consumers. Breakfast cereal is one of the most affordable sources of calories in the grocery store, but the environment for price increases is inopportune with the headwinds facing the consumer. We have removed General Mills from the Long Bias list, and WK Kellogg is on our short bias list.  

Staples Insights | Oct. PPI (KLG, GIS), Retail Sales (KR), Global wine production (NAPA)  - staples insights 111523 2

Staples Insights | Oct. PPI (KLG, GIS), Retail Sales (KR), Global wine production (NAPA)  - Consumer Staples position monitor wo slide

Retail sales (KR)

The headline retail sales decreased by 10bps sequentially in October and decelerated 160bps to 2.5% YOY. Grocery store retail sales increased by 0.9% YOY in October, decelerating by 40bps from September. The growth rate in October was the lowest since May 2021, when we were lapping the pandemic shutdown. Traffic growth has been a challenge for the supermarkets for some time, but food inflation masked the top-line headwind previously. The prospects for positive SSS growth for the grocers in 2024 are poor.

Staples Insights | Oct. PPI (KLG, GIS), Retail Sales (KR), Global wine production (NAPA)  - staples insights 111523 3

Food away from home sales decelerated to 8.6% YOY from 10.2% in September. Retail spending for both food channels combined remains elevated historically, as seen in the chart below. On a TTM basis, the combined food spending increased by 7.8%.

Staples Insights | Oct. PPI (KLG, GIS), Retail Sales (KR), Global wine production (NAPA)  - staples insights 111523 5

Global wine production falls (NAPA)

The International Organization of Vine and Wine (OIV) reported that global wine production has likely fallen 7% YOY, to a six-decade low this year. The OIV blamed bad weather for the poor production. Europe produces nearly 60% of the world’s wine, and production is projected to be down in almost every country of the E.U. Yields are estimated to be down 14% in Spain, down 12% in Italy, down 20% in Chile, and 25% in Australia. Production in the U.S., on the other hand, is estimated to be up 12% YOY. Production in France is estimated to be flat, but the French government announced it would allocate €200M to destroy surplus wine inventory due to falling demand. Don’t expect wine prices to rise because of lower production. With consumption falling and inventory levels high in many regions of the world, the wine industry hopes the drop in production brings the market into balance.