July Consumer Spending (GO)
On Friday, the Commerce Department reported that consumer spending rose 1.9% month over month in July, compared to +6.2% in June and +8.6% in May. The supplemental unemployment benefits ended at the end of July. Spending is still 4.5% below the level in February. Friday’s report also showed that incomes rose 0.4% in July after two months of declines. Regular and supplemental unemployment benefits accounted for nearly 7% of total personal income in July. The supplemental unemployment benefits boosted spending power by $15B a week as a bargain supermarket Grocery Outlet is positioned to benefit from tighter household budgets.
In-stock level and promotions continue to be linked (ACI)
Total distribution points, a measure of breadth and depth of an item, continue to be down ~8% for the past six weeks up to August 15, as seen in the left-hand chart below. During the pandemic, CPG manufacturers have had difficulty keeping up with the increased demand, and many have limited SKUs to make it easier on volume production. Promotional levels have been tied to in-stock levels during the pandemic. The right-hand chart below shows that promotions, which at one point were down more than a third, have slowly returned toward prior-year levels. However, over the past month, promotional levels have been dropping to nearly 20% lower YOY. With elevated demand, promotions have been unnecessary and sometimes counter-productive for improving in-stock levels. Consumers have been trained during the pandemic to purchase the product they want or a substitute because out of stocks were more common, and they made less frequent trips to the supermarket. The lower promotions are a margin tailwind for the grocers and CPG manufacturers.
Smoke gets in your grapes (STZ)
The heat in August has led to an earlier harvest in many vineyards in Northern California. This led to the fires in California this year coming during harvest time for California’s winemaking region. The LNU Lightning Complex fires have been burning through Yolo, Sonoma, Napa, and Solano counties for 12 days and were a little more than half contained on Sunday evening. Grapes are particularly vulnerable right before harvest to absorbing chemical compounds from smoke that can create a very undesirable taste known as “smoke taint.” Many vineyards rushed the harvest or were lucky from the direction of the smoke, but some may not know if the wine is affected until fermentation or after it has been bottled. The area’s wine grape crop was valued at $1.7B last year. Crop insurance would cover smoke taint for the growers. The immediate impact has some vintners looking elsewhere for supply in case the smoke causes a shortage this year. Many of Constellation Brands wine brands purchase grapes from growers rather than owning the vineyards, which gives it more flexibility in sourcing. 2020 may be remembered for more than COVID-19 for the California wine industry.
