Food accounted for 37% of Wal-Mart’s US sales in 2012 vs 23% in 2002, but its growth has started to decelerate, and we can expect more destocking of major brands, a greater focus on private label, and renewed interest in higher-end health & wellness products, predicts one analyst.
In a note to investors ahead of Wal-Mart’s Q4 results tomorrow (Feb 20), Consumer Edge Research global packaged food senior analyst Robert F. Dickerson predicts that Walmart U.S. and Sam’s Club will likely post negative Q4 comparative sales, driven partially by the reduction in the U.S. Supplement Nutrition Assistance Program (SNAP/food stamps).
He added: “We continue to see pricing risk coming from the retailer, as traffic growth remains poor, the company remains over-indexed to the lower income group, dollar stores are competing on price, and ‘natural’ grocery continues to take share.”
As a result, he said,“Our expectation is for Wal-Mart’s full-year 2015 to include continued large-cap product destocking, further pricing pressure via tiered private label to drive low-income traffic, and slight experimentation on the higher-end to bridge the gap with the likes of Whole Foods traffic results.”
Companies with higher exposure to private label will have less pricing power in their categories
So which food manufacturers are likely to see the biggest impact?
According to Dickerson, JM Smucker and Kraft Foods are “on the higher-risk end of the risk spectrum”, as “both companies share above average private label share in their respective categories, both have lost significant share over the past two years, and they hold the #1 and #2 Wal-Mart sales exposure.”
Meanwhile, Hershey, Kellogg and Mondelēz International are at the lower end of the risk spectrum given that they are in categories with lower levels of private label penetration (confectionery, snacks) and also have a lower exposure to Wal-Mart, he said.
“Companies with higher exposure to private label will have less pricing power in their categories. What’s more, as input costs ease, many retailers may look to increase private label shares as typically narrow profit margins expand.”
He added: “We’ve seen Smucker already lower pricing and we’ve seen Wal-Mart already destock Kraft’s products more substantially over the past year relative to our food coverage, giving us faith in our risk assessment…
“If we don’t see price deflation, we should see further shelf resets at Wal-Mart, in our view, just as we saw in 2014.”
Health & wellness food subsector continues to outpace nicely all other branded packaged food
So where are the growth opportunities in the US grocery retail arena in 2014?
According to Dickerson, the health & wellness food sub-sector “continues to outpace nicely all other branded packaged food”, while distribution of these products has increased by 15% over the last five years, as more and more brands that were previously focused on the natural channel are now sold through mass market retailers.
“If we look at total health & wellness sales on a point of distribution basis, we still see sales growing approximately 11% year on year, a strong result in our view, ex-distribution,” he said.
KIND, Clif Bars, Chobani. Naked Juice: As distribution increased, price per volume decreased
But as these brands hit the mass market and gain a wider audience of low and medium income consumers as well as wealthy people, prices tend to go down, he said, citing as an example four health & wellness brands (Chobani, Clif Bar, Naked Juice, and Kind), that have gained distribution though the mass channels.
“We can see that as distribution increased, price per volume decreased. If we couple these four examples with the fact that overall US health & wellness food has already seen substantial distribution gains and promotional activity has increased, we believe that US health & wellness food, on average, will face lower pricing over the next few years, thereby placing incremental pressure on our large-cap packaged food coverage universe.
“Health & wellness pricing should come under increasing pricing pressure over the next three years, which in turn should pressure even more so the pricing of many non-health & wellness products currently seen on the grocery shelf.”