The explosive sales gains most grocery retailers are experiencing amid the nationwide coronavirus pandemic could be short-lived—and leave a long-term mark on profits, according to new research from Barclays.
The abrupt changes in consumer spending patterns accompanying the panicked buying could shift more than $100 billion in food sales from the restaurant to retail channels in the second quarter alone, but both food price deflation and broader economic effects of the pandemic could weaken overall demand in the long term, Barclays analyst Karen Short said in the report.
“In our view, COVID-19 has parallels to both 9/11 and the [2008-2009 recession],” Short said in a note to clients. “The 9/11 period led to ‘nesting’ [and] ’08/’09 led to demand destruction. COVID-19 will lead to both.”
She estimates that between $61 billion and $118 billion in food sales would shift from away-from-home (restaurants) to at-home (food stores) during the second quarter as thousands of eateries nationwide face mandatory or voluntary closures and restrictions, and consumers are urged to stay in their homes to slow the virus’ spread. That would mean estimated sales lifts of 32% to 62% in the quarter and about 8% to 15% for the fiscal year.
However, Short noted the sales increase would likely accompany a basket shift toward lower-margin center store items and an increase in less-profitable e-commerce sales. When the “nesting” trend lifts, food stores could lose much of their sales back to out-of-home channels and see a greater percentage of remaining customers hooked on e-commerce. These changes in customer behavior “may impact profitability for a prolonged period,” Short said.
“A strong top line will mask e-commerce inefficiencies for now,” she added, but “as demand normalizes and e-commerce is the new norm, profits [will] be pressured.”
Short predicted that food retailers could benefit from short-term stock-ups and inflation, these effects would reverse themselves once the surge abates. She predicted “meaningful deflation” arising from reduced demand and excess supply. “The grocery sector is benefitting on the front end of this cycle, but will be meaningfully challenged on the back end,” she said.