Discontents: 1. Feds Wake Up To Price Inflation. 2. Target Lowers 5,000 Prices. 3. Store Visits: Target On A Monday Morning. 4. Product Reviews. 5. Tunes
Congress Wakes Up To Price Inflation. Federal lawmakers are finally clueing in to food price inflation. The better-late-than-never activity comes after 3 years of well documented profit-driven price inflation by leading manufacturers and retailers. A recent FTC report detailed how major grocery chains took advantage of supply chain disruptions to raise prices and rake in blockbuster profits. It is not pretty.
Inflation continues to be a top concern for anyone with a pulse. Retail prices have gone up over 30% across the store and over 50% on such items as beef, pet foods, diapers, and many processed foods, like tater tots. Study after study has shown that corporate profits accounted for 50% or more of all price inflation (and oil price fixing caused another 20% of inflation in 2021 alone).
The grocery industry is highly concentrated. Just 5 chains control over 50% of all grocery sales (see chart below). Hundreds of metro areas have just 1 or 2 major chains. Most grocery categories are dominated by a handful of CPG (consumer packaged goods) suppliers, like Nestle, Kraft Heinze, Kellogg’s, etc. Even Walmart raised Great Value brand prices well above the rate of inflation.
Some of the least popular and most profitable grocery industry practices are also on the FTC hot seat. These include slotting fees for product placement, category captain arrangements that allow top selling brands to make decisions for their whole category (including competing items) and volume based rebates that incentivize category concentration from incumbent brands with deep pockets. There would be a lot of winners if such practices were tightly regulated or banned: more diverse small and emerging producers that can’t compete with the massive trade spend of big brands, as well as consumers who would have a wider variety of choices on shelf. The fact that lawmakers are actually pushing to modernize antitrust laws such as the Sherman Act, the Clayton Act and Robinson Patman, would be a generational change in how regulators view competition.
Lawmakers want the FTC to take the lead for much of this reform. Under the leadership of Lina Khan, the agency has woken up from a 40 year slumber where market concentration was tolerated as long as food was cheap. The FTC’s regulatory inactivity enabled Walmart, Kroger, Albertsons and Ahold-Delhaize to grow and dominate market share. But consolidation effectively killed cheap food.
What do lawmakers want the FTC to do? The agency could issue guidance on Robinson Patman Act violations. It could investigate and take legal action where it found anti-competitive practices. The FTC and DOJ could work together to prevent further consolidation by scrutinizing and blocking mergers, as they have started to do with $25 billion Kroger/Albertsons mega-merger. Based on recent surveys, over 70% of consumers would support such policies. In the meantime, prices will stay high on everyone’s minds.
Target Lowers 5,000 Prices. Target is lowering prices on over 5,000 high velocity products. Both store brands and branded items in milk, meat, soda, fresh produce, snacks, yogurt, coffee, and pet foods will come down. This could mean the price drops are a combination of Target investing in price out of its own margins or negotiating lower costs or higher discounts with hundreds of participating suppliers (See my commentary on Whole Foods prices).
In recent years, unit volumes and customer traffic slowed while retailers skimmed higher profits off of supply-side cost increases. These were known as the “price over volume” strategies. Target’s profits spiked to $4.1 billion in 2023, up from $2 billion in 2022 despite a 1.6% sales drop.Their margins rose from 3.5% to 5.3% in that timeframe, a 50% increase. So yes, they made higher profits off of selling less stuff. When both profit dollars and profit margins increase so dramatically, that is usually a result of passing higher prices through to consumers than they received from suppliers. So, are these price drops a tacit admission to price gouging? Or is this a mass market price war?
The price drops are also a tacit admission that retailers can lower prices when market dynamics demand such action. It is not as though costs have come down. Inflation has flattened out, meaning the increases have slowed. Some commodities have stabilized, while others are still rising. Retail pricing is arbitrary. Pricing is bullshit.
Retailers fuck around with pricing based on what makes them the most gross margin, what brings in customers, what drives basket size, what drives unit volumes. This all depends on what their category and department strategies are, what financial targets are hanging over the heads of store and category managers, what their ownership or investors want (market share, profit margins, store growth, all of the above lol), what their competitors are doing and, of course, what their customer base will react best to.
Higher retail prices don’t always denote high costs, although they usually mean higher profit margins. And low prices vice versa, although much of the time many elements of cost have been left out of the prices of the cheap shit. These “externalities” sometimes add up to 2 or 3 times the actual price of the product, like healthcare expenses from eating too much meat or processed snacks, biodiversity loss from GMO corn and soy monocultures, wage theft or underpaid prison labor, or air and water pollution from herbicides and pesticides.
Target is not thinking about these broader issues. They have shareholders to answer to. They see an opportunity to bring customers back into their grocery departments. Target grocery underperforms relative to Walmart or Costco. Target has also lost market share (based on data from Chain Store Age via Numerator):
Target’s big sale should boost unit velocities, bring more customers into stores, and get them to buy products at Target that they are probably now getting elsewhere. Target may sacrifice some margin rate up front but will make up for it in sales volume and profit dollars. Target also sees that almost all consumers, including their middle class, suburban demographics, are sick and tired of overpaying for groceries. Sounds like a winning strategy.
Store Visits: Target On A Busy Monday Morning. I stopped by a Target in South Austin for some groceries on Monday morning. I also wanted to see the big deals they were advertising. The place was packed. I walked in right after they had unloaded their truck. There were shrink wrapped pallets in the aisles and stock clerks breaking down cases and filling shelves.
Target grocery has always been hit or miss. They tend to be aggressive on price. They have wide ranging store brands, which are merchandised adjacent to their competing national brands. They sell a lot of trend-forward, plant-based and “better for you” items. They also sell lots of those big national brands that pay slotting fees and captain their categories.
Target is not a big destination for diverse, small and emerging brands, although every so often they do a PR push to convince everyone otherwise. They are a mass merchant that blends their low margins in food with aisles of high margin housewares, apparel, camping and automotive supplies, toys and electronics. Food is not a destination like it is for Walmart, which controls almost 30 cents of every grocery dollar spent in the U.S.
Overall, the Target grocery assortment was thorough. Their merchandising and inventory levels were tight, even on a Monday morning. Target grocery is poised to gain market share, most likely at the expense of higher priced independents and regional chains. If you are a retailer, keep an eye on the bullseye.
4. Product reviews. I am not a big junk food guy. I have never gone in much for sweets, although I was known to occasionally stress eat a sleeve of Oreos during inventory counts. But donuts? Meh. Tim Horton’s, Dunkin’, Krispy Kreme? Nah.
So now that I am old, glucose and gluten intolerant, I can appreciate the finer things, such as donuts that won’t make me feel like death when I eat them. Maybe that is a low bar? I dig these donuts from Drumroll. I will go to HEB just to get them. They actually taste pretty good and give me nostalgia for the frozen Entenmann’s mini-donuts I used to get at the bodega on Boston Road. So big shout out to Drumroll for clueing me in to their low sugar, high protein, actually-pretty-good snacks. These donuts are not bullshit.
5. Tunes. It’s been a long week. Isn’t every week? Here’s a tune
to take the pressure off.
peace.