Organic produce sales remain elevated (SFM)
In the first half of 2020, organic fresh produce sales increased by 11%, with volumes rising 13% according to the Organic Produce Performance Report. Sales during the April through June period increased 17%, with volumes increasing 18%. The report said, "Indications of double-digit growth is slowing somewhat from the second quarter, but sales and volume growth remain very robust." Currently, organic produce accounts for 10% of all produce in the US. The report also said, "The start of Q3 in July did see a continuation of double-digit growth - in the low teens - and we should see similar levels heading into the fall if supplies remain readily available." Organic produce is a top traffic driver for Sprouts Farmers Market. The company noted July sales trends were similar to June and expected SSS growth of 9% for the first month of Q3.
South Africa lifts alcohol ban (BUD)
South African President Cyril Ramahosa ended a ban on alcohol and tobacco sales and relaxed other lockdown restrictions over the weekend.
In late March, South Africa implemented one of the strictest lockdowns – the government banned the sale of alcohol from March 27 to June 1, then reimposed the ban on July 12. The aim was to reduce the number of alcohol-related hospital admissions to handle COVID-19 better. The country's crime rate also fell 40% during the three-month lockdown. Numerous protests occurred, and the economy took a hit from the ban. The alcohol industry employs a million people in the country. Heineken and Molson Coors both announced a suspension of plant expansion as a result of the ban. At the local level, 60% of restaurant revenue is from alcohol sales.
The President said, "Amid the signs of hope, we are ready to enter a new phase in our response to the pandemic." Restaurants and bars will be allowed to reopen. South Africa is an important market for global brewers, including Anheuser-Busch, Molson Coors, and Heineken. South Africa has a higher rate of alcohol consumption and binge drinking than the continent and the world.
Position Monitor Changes (GO, BUD, & KR)
We are moving Grocery Outlet up on the Best Idealist to #3. The current environment is very favorable for Grocery Outlet due to higher unemployment, inflationary pressures on food, increased real estate availability, and new relationships with foodservice suppliers.
Anheuser-Busch is at the top of our Long Bias list due to the aforementioned lifting of South Africa's alcohol ban.
We are also moving Kroger down on the position monitor from the top of our bias list to #4. Kroger shares are up 11% since we added it to the bias list in early April. Kroger shares have outperformed due to 1) elevated level of grocery sales, 2) investors' confidence in the company's e-commerce offering, including Ocado, and 3) improving the visibility of 2020 EPS estimates.
In the future, we see less out-performance as 1) grocery sales continue to decelerate, but remain elevated 2) relative valuation with other grocers, and 3) absolute valuation compared to organic growth prospects.
