Mexican beer shortage (BUD, HEIA, STZ)
The wine industry is still open in Mexico, but beer production stopped in early April when it was deemed non-essential by the Health Department. So the country isn’t “dry,” but Mexicans drink a quart of wine per person per year compared to 72x that in beer. (The mezcal and tequila industries are still producing.) Oxxo, the country’s largest convenience store channel, said on April 30 that it only had ten days worth of beer left. The head of an association for mom and pop stores said beer represents 40% sales during hot weather. With supplies very scarce, some are looking to import beer, which is not much relief as US prices are two to three times higher (less than black market prices). Also, travelers are only allowed three liters of beer duty-free into Mexico. Still, Mexican laborers with work visas are bringing back beer from the US. Constellation Brands, which is still producing beer in Mexico for export at reduced capacity, is a beneficiary. Few politicians are more popular than beer, so my money is on the situation changing in favor of BUD and HEIA.
Grocery Outlet has the demand, can it keep sourcing the supply?
Grocery Outlet reported Q1 EPS of $.36 vs. the consensus estimate of $.30 and $.15 last year. SSS increased by 17.4% (previously reported), accelerating from the +5% range in the previous three quarters. Gross margins expanded 30bps due to reduced markdowns due to faster inventory turnover. EBITDA margins expanded 100bps. SSS QTD is tracking up mid-teens despite traffic declines. In a typical environment, traffic declines concern us, but consumers have shown a reduction in shopping visits during the quarantine, which has caused an average check to increase. The company noted that operating expenses are higher for additional cleaning, costs for protective equipment, overtime, and premium pay during the current environment, similar to other food retailers.
Management said the inventory situation is very healthy as the strong comp sales in mid-March led to warehouses re-stocking the stores right before the end of the quarter. The company has developed many new relationships with non-traditional suppliers that serviced restaurants, food service, department stores, airports, etc. that have seen demand drop from COVID-19. The question often asked is, how long can this favorable (for GO) situation last. The grocery inventory from the immediate demand drop is generally past its use dates now, but demand has not improved dramatically for the previous customers. Not to say the question isn’t the right one as supply disruptions generally benefit closeout buyers. Off-price clothing retailers TJ Maxx and Ross Stores benefited from the demand drop in clothing retailers after the last recession. They were able to find ever-increasing amounts of inventory over the following decade because the manufacturers still needed to find a retailer. Over time they even “trained” customers to reduce their spending on full-price apparel. The situation in grocery could have several similarities to the off-price apparel retailers.
Grocery spends stabilizing at “elevated.”
In the 8th week of our consumer survey, the share of respondents that said their grocery spending was the same as the prior week reached a new peak of 43%. Also, the number saying they are spending less reached a new low as seen in the following chart. Together this would point to a stabilization of grocery spend since the stockpiling in mid-March (at an elevated level as seen in the final chart).
Local grocery stores have also seen a stabilization of trend during April, as seen in the following chart from Womply (a CRM provider).
After adjusting the same sales data for only the local grocery stores still reporting transactions, it results in an elevated level of spending, as seen in the following chart.
