Grocery Update Volume 1, #2

The essential take on the $1 trillion U.S. grocery sector.

Discontents: 1. Cultivated meat bans. 2. Whole Foods pricing fun. 3. Plant-based foods data. 4. Robinson Patman Act 101. 5. Retail Visits: PCC Community Markets. 6. Product Reviews: sentient tamales and skibidy chili crisps. 7. Tunes

1. Cultivated Meat Bans: A couple of states are announcing bans on cultivated meats. The state bans are in conservative-run states Florida and Alabama. Beef consumption has taken a hit due to price inflation since 2019 (Data source: NIQ) and there is no threat from any of the alternate proteins. Beef consumption has also become a culture war fetish, with red meat consumption a stand-in for manliness. Cultivated meat has been approved for sale in the U.S. as well as in Singapore. It is grown from animal cells in fermentation tanks in a process that is more akin to brewing or pharmaceutical production.

   While this food-tech has triggered hard right governors, it is even harder to get through the haze of it’s world-saving promises. Journalist Joe Fassler has written about the technical feasibility both here and here. My colleagues at IPES-Food wrote a report about the economics and it is quite good. And I wrote a piece e a few years back in Forbes. But honestly, I get bored by food-tech.

   In Europe, Italy has also announced a ban on cultivated meat. Farmers across the European Union are pushing governments to do likewise, including in Austria, France, Greece, Hungary, Romania and Slovakia. In Europe, the concerns are around harm to farm income, traditional food-ways, and competition, and are not surprising given the recent farmer uprisings.

   On the other hand, investors have already dumped over $3 billion dollars into funding cultivated meat, before any market validation. But some of the major funders, besides Silicon Valley types, are the meat oligopolies such as JBS and Cargill. They rake in meat profits by exploiting workers, keeping farmgate prices low and consumer prices high, and are always hedging their bets on global food system domination. Such investors are not altruists.

   Instead, my take on food-tech is about risk assurance and transparency:

   1. How will such products be labeled and marketed to consumers? 

   2. What is in the feed stock for the nutrient medium that such products are grown in? Will the feed stock be derived from cheap, plentiful but chemical-laden byproducts of GMO agriculture , particularly soy and/or corn?

   3. What else is in this growth media and what is the disposal method (at scale) for the spent media once the protein is extracted?  

   4. Are animal derived ingredients, including fetal bovine cells, in the production mix? What about the use of antibiotics in cell cultures to control growth of unwanted microbes?

   5. What are the types of molecular scaffolds that such products will be built on and will such ingredients be transparent to consumers?

   6. Will novel genetically engineered microorganisms have a role in the production process?

   7. What other novel, unintended proteins or byproducts will be present in the finished product? Will these also need to be identified and labeled for consumer transparency?

   8. Will consumers with food sensitivities/allergies, autoimmune  or inflammation issues be able to safely consume such products?

   9. What is the bioavailability and nutrient density compared to various techniques of animal-based agriculture? Recent research on precision fermented products raises such questions.

   10. Will the cell-based analogues be patented and subject to intellectual property protections? And will secrecy enabled by patents and IP protections make these conversations around transparency a moot point? This is ALWAYS the punchline with food-tech. Why else would investors throw $3 billion at it?

And finally, it is always fun to read corporate SEC disclosures about food-tech. Here is what one company unveiled to investors about risks:

• “The genetically engineered organisms and materials that we develop may have significantly altered characteristics compared to those found in the wild, and the full effects of deployment or release of our genetically engineered organisms and materials into uncontrolled environments may be unknown...”

So, do these bans make sense? Considering all the ongoing harms of our food system: large scale concentrated animal feedlots and meat processing; child labor or prison labor across the food system; how Alabama enables modern-day slavery and Florida bans heat protections for farmworkers; how both states’ leadership have retrograde policies on abortion, gender/sexuality, voting rights, affirmative action, free speech, climate change, etc., this is a bad-faith distraction. Food-tech bans, like most food-tech, are boring. We have real problems to deal with.

2. Whole Foods Prices: I get skeptical when I see excitement about retail prices coming down. Not because I haven’t thought a lot about inflation over and over or because I think pricing is actually bullshit. But outside of major commodity cost deflation (not happening folks!), the only ways retail prices drop are through cutting expenses such as labor or by getting more supplier discounts and fees.

   In this case, it looks like Whole Foods is doing an aggressive price promotion event funded by suppliers to drive unit sales volume, customer traffic and customer basket sizes (how much stuff each customer buys per trip). The suppliers fund the discounts, which Whole Foods passes through, and the suppliers also pay ad fees or listing tolls. In this case, for each group of products the supplier puts on discount, they pay around $10-50,000 for the privilege of having the retailer reflect their discounted price on shelf. Fees are a very common practice in retail, a huge source of revenue for the grocer, and a big expense for the supplier. The suppliers fund these discounts and fees through their trade spend, budgeted usually around 15-20% of annual sales and accrued through every item sold. The supplier benefits by selling more products and staying competitive with their peer brands.

   And customers still benefit because they are getting thousands of products at a better price for a limited time, usually a 2-3 week window, with 2 event cycles per month, every month of the year. Less than 40% of Whole Foods’ sales are done on promotion. But if they have negotiated these deals accurately, they typically make better gross margin on sales than during regular pricing timeframes. If anything, this is the best win for all and beats price drops based on cutting labor and headcount costs. But it also means that once the sale is over, prices go back to normal. (Note: This is called a high-low strategy, which most retailers use. Some chains, like Walmart and Aldi, are everyday low price, or EDLP.)

   Non-union Whole Foods cut labor aggressively from 2015-2019, by combining teams, reducing full time staff and doing several rounds of layoffs. That G&A (general and administrative budget) savings was reflected in lower prices on many items, especially after Amazon took over. But they also kept prices very high on many other items, because Whole Foods is still a premium merchant. Over 20% of their sales are in food service and they are essentially one of the nation’s largest restaurant chains. That means high labor costs. They also have highly skilled staff running full service meat, seafood and cheese counters. And even though they are dabbling in self-checkout, close to 20% of their total labor costs are those hard working cashiers. Seriously, I could stock 100 cases an hour but I could never handle working at the checkout counter. Hence why I named the newsletter after it. The checkout would kick my ass.

   So, while “value messaging” makes for good P.R., the primary selling point of a high-touch, premium retailer is the quality, service and customer experience, anchored by full time, well-compensated employees. That is not the case for most grocers these days, with everyone chasing Walmart and fending off cost inflation (i.e., cocoa, beef, sugar). The success of such events means customers may see more deals as they grapple with high food prices.

3. Plant-based foods sales trends. The long term trajectory of plant-based processed foods is bright, with most people buying and eating them more regularly. Even if highly processed, they are typically better than conventional processed meat products in environmental, health and nutrition indicators. But it’s not a smooth ride for the categories lately.

   Plant-based processed food sales are down this year to $8.1 billion, or about 8% of all grocery sales. This is not surprising considering the glut of lookalike Impossible/Beyond-style burgers and chicken analogues that have flooded the marketplace since 2018. But, this data is based on a limited definition created by the industry and is really self-defeating.

   Why? Because actual “plant” food sales are doing great. Produce department sales have continued to grow faster than most categories over the past few years (and have seen less price inflation than the processed food categories in center store). This includes fresh greens, berries, apples, citrus and root veggies. And many other “plant” items, such as bulk and packaged grains, lentils, beans, nuts and seeds, continue to gain sales and market share across the industry. And when you add up all these “plant” sales, they are nearly $100 billion, higher even than retail meat sales (@$90 billion). (Source data: NIQ, shared with author)

   So, the limited definition of “plant-based” foods may have been helpful when interest rates were low and investors were flooding hot startups with cheap cash. But now? It is self-defeating in such a rocky moment for the industry and ignores one salient fact: people are eating more plants. And that is great.