KHC incurs a 3rd shift for mac & cheese
On Monday, Kraft Heinz provided a business update. Sales are expected to grow 3% in Q1 compared to the consensus of a 4% decline. Organic growth is now expected to grow 6% up from previous guidance of an LSD% decline. The company’s packaged food units are working three shifts to meet high demand, especially for macaroni and cheese in the U.S. and canned beans and soup in the U.K. The company added that it does not expect the full benefit from the additional sales to flow through to the bottom line due to additional associated expenses. The CEO also said, “Operations in China are returning to normal now, but… consumers’ behavior has changed, as individuals are using more home deliveries.” Management said on the other hand foodservice sales have declined significantly. In response, the company said that it had slashed production at three manufacturing facilities (two in the U.S. and one in the U.K.) that provided food for restaurants. We believe the share shift from food away from home to food at home is longer in duration than current market expectations. Restaurant distributor Sysco will see significant decremental margins from that shift. We are presenting our full SYY short thesis tomorrow at 10 AM ET. For slide materials and video link: CLICK HERE
What food the Europeans are buying
According to market data from IRI and BCG sales for the first week of March shows sales of paper products, health care products, and packaged goods have increased significantly in Italy, France, and the U.K. Europeans have loaded up on foods with long shelf lives while avoiding gourmet foods. In France and Italy sales of cosmetics fell while in the U.K. and Italy sales of general merchandise fell. According to a report from E.U. agricultural ministers, “Demand for higher-value products, such as wine, fish, flowers have weakened significantly; in the case of flowers, it has completely collapsed. Conversely, demand for shelf-stable products like rice, pasta, eggs, canned goods, long-life fruits, and vegetables has risen sharply.” Alcohol sales were up except in France, where it was down 4% due to a drop in Champagne sales. Italians spent 53% less on Champagne, but 14% more on beer. According to the IRI and BCG report, the Italians started to stockpile groceries on Feb. 16 while the French began on Feb. 23, well before the social distancing measures began. Italy reported total retail sales growth of 5.73% YOY in February, up 423bps for the best print since August 2005 as consumers bought food and supplies for the coronavirus lockdown.
Will warnings about visiting the grocery store impact traffic?
Dr. Deborah Birx, coordinator of the White House coronavirus task force, on Saturday said the U.S. should see a dramatic increase in coronavirus deaths this week. She said, “This is the moment not to be going to the grocery store, not going to the pharmacy, but doing everything you can to keep your family and your friends safe.” Several governors this week echoed her comments about limiting trips to the grocery store. L.A. County’s public health director said, “If you have enough supplies in your home, this would be the week to skip shopping altogether.” It will be interesting to see if the warnings from the government have an impact on visits this week. Most people visit the grocery store because they have to. Lines to enter the store, prescribed paths marked on the floor, many workers and customers wearing masks, many awkward social distancing encounters – it’s hard to see that anyone wants to be at the grocery store now. Good luck to any discretionary store driving traffic with that in place.
