Report: Inflation Adjusted Grocery Sales
A deeper dive into consumer behavior data and what the numbers mean for grocers
Eric Karlson
Strategy & Insights
Executive Summary
- Grocery sales in 2022 will likely be up 6%-8% YOY with food inflation expected to come in around 10%-11%. This means that all positive growth is due to inflation. Inflation-adjusted sales for grocery in 2022 will actually be in negative territory
- This contraction in inflation-adjusted sales is due to shoppers shifting behaviors to lower priced products, and lower priced channels, and the purchase of fewer non essential items. We’re seeing higher cross shop, higher inflation, and lower disposable income, resulting in a shift in foot traffic to mass and discounters, while premium retailers are losing ground
- Disposable income has helped to explain the stimulus-related jump in grocery spend in 2020 and 2021, but is softening in 2022 and will impact price sensitivity and grocery spend into 2023
- Cross shop softened in 2019 and 2020 but we expect competitive intensity and cross shop to increase in 2022 as COVID wanes, food prices remain elevated, and disposable income falls
- Both Kroger and Albertsons noted in their most recent 10Q calls that they expect inflation to moderate in the back half of 2022, which is supported by lower gasoline prices and a flat food & feed PPI for almost a year. But recent numbers are showing core and food inflation is more sticky than many expected. This has spooked the stock markets and is causing many to reassess how long it may take to wring out the inflation momentum
The Grocery Market
Many are looking at how the softening of GDP will impact grocery sales. Historically there is a mild link between GDP and the grocery market because “people gotta eat.” There will be some impact on grocery through real disposable income, but the key variable to follow is food inflation. As food inflation goes, so go grocery sales. GDP and falling disposable income are weighing on grocery sales but inflation is so high that top line grocery sales will remain robust in 2022. Grocery sales are expected to be up more than 7% YOY in 2022, which is on top of a 9.1% increase in 2020 and a 3.5% increase in 2021. However, all of that positive growth is due to inflation, which will likely be up over 10% in 2022. And when we adjust for inflation, sales in 2022 will actually be negative.
Historically there is a mild link between GDP and the grocery market because “people gotta eat.”
Grocery Sales and Growth
Sales vs. Inflation Adjusted Sales
So in what direction is overall inflation and food inflation headed
Overall inflation for all items appears to have peaked in July, which is the top chart below, but it appears to be driven largely by lower gasoline prices. However, the core inflation rate – which excludes fuel and food – went back up in August. The core CPI is a more broad based view of the economy and excludes the more volatile food and fuel. The stock market dropped more than 1.5% after the core CPI was reported. The more sticky inflation is, the more the Federal Reserve will need to increase interest rates, and the higher the interest rates, the larger the negative impact on the economy.
PPI Final Goods vs. CPI All Items
Core PPI Final Goods vs. Core CPI All Items
In their recent Q2 10Q calls, both Kroger and Albertsons noted that they expect food inflation to moderate in the back half of 2022, and that seems reasonable with gasoline prices falling and a flat food PPI. But August came in 13.5% higher YOY, which is the highest for 2022. With the core inflation for all items bumping back up, and food inflation yet to peak, many are reevaluating how long and how much Fed action will be needed to quash inflation.
PPI Processed Food and Feed vs. CPI Food-at-Home
The combination of higher inflation and lower disposable income are also increasing competitive intensity, price sensitivity, and cross shop. As a result, we are seeing a shift to the discount channel and a downward trend in both gross margin rates and EBIT across the grocery industry. It is interesting to see the Club channel down 2% as one would assume they would be well positioned in an inflationary environment. But they are associated with large expensive baskets and not being a quick or convenient shop. This runs contrary to the market trends. First, shoppers are visiting more frequently and purchasing less on each trip. And with the low rate of unemployment, time and convenience are still an important trip drivers.
B&M Visit Growth
Operating Profit and GM Rate
It also appears inflation pressures and high price sensitivity are impacting eCommerce penetration rates, which peaked at 15% in early 2021 and which has only rebounded slightly over the last two months after sliding to 10%. But it’s worth noting that even with the downward trend, eCommerce penetration is more than twice as high today as it was before the pandemic.
The eCommerce softness is also seen in the grocery web visits, which shows 2022 continuing to trail 2020 and 2021.
eComm Grocery Penetration
Grocery Web Visits
Closing note
Overall, the outlook for grocers is mixed. The economy is seeing a slowdown, which was expected and orchestrated in part by the Federal Reserve with a persistent increase in interest rates. But, the job market remains strong, with job openings exceeding new hires, and the unemployment rate is near an historical low. Inflation is also mixed with some early signs that we may be peaking with negative price indices in the upcoming months. Yet food and core inflation remain sticky. Finally, grocery is mixed as top line sales continue to grow but margin and profit take a hit. We also see inflation impacting eCommerce sales as many shoppers are simply less willing to pay fees for pickup or delivery. Lastly, we see a channel shift from Premium and Club banners to Discounters.