Fresh produce demand remains elevated (SFM)
Fresh produce demand grew 10% YOY in the week ended August 9, accelerating 1% from the previous week as seen in the following chart. Fresh vegetables demand decelerated 1% to 13% in the week ended August 9. Fresh vegetables indicate cooking at home, which remains elevated. Fresh produce is a key traffic driver for Sprouts Farmers Market. The company guided July SSS expectations to be up 9% YOY. Even though unemployed recipients of the additional $600/week in federal support are now eligible for food stamp benefits, food purchases have decelerated with the expiration of the extra benefits.
The gap between dollar growth and volume growth widened in the latest week as produce sales increased 9.5% and volumes increased 5.8% as seen in the following chart. Overall inflation was 3.5% with fruit having greater price/mix growth of 4.1% than vegetables at 1.7%.
Conventional grocery distribution growth exceeds organics (GO)
Organic produce demand has continued to outperform conventional produce during the pandemic. The largest barrier for organic produce is the higher prices at about double conventional produce prices. “The highest growing categories – bananas, carrots, apples – have the smallest price gap,” according to Steve Lutz, SVP of Category Partners. Organic produce is a key differentiator for Sprouts Farmers Market as well as Grocery Outlet, two of the fastest growing grocers. Despite the growth in their store bases, conventional grocery distribution points has exceeded organic grocery in every region of the country except the Northeast (where neither Sprouts Farmers Market or Grocery Outlet are opening new stores), as seen in the following chart. The greater demand for organic produce coupled with the slower supply growth is a favorable backdrop for their store expansion plans.
Stricter organic rules proposed (SFM)
The Agricultural Marketing Service (AMS) has proposed stricter enforcement of the USDA organic regulations. AMS has proposed amending the USDA organic regulations to strengthen oversight and enforcement of the production, handling and sale of organic agricultural products. The proposed rule covers topics like import certificates, record keeping and product traceability, unannounced on-site inspections of certified operations and annual update requirements for certified operations. The comment period ends on October 5. The industry has had a mixed reception to the proposals because of the higher costs that would accompany stricter enforcement and record keeping. Stricter rules would also likely reduce the supply of organic produce.
