With inflation still elevated in center-store grocery categories, Walmart may use its market power to press consumer packaged goods (CPG) manufacturers to rein in pricing, CFRA Research analyst Arun Sundaram reported.
Perishables categories, namely fresh meat and produce, have “meaningfully” trended downward in inflation over recent months, whereas prices of packaged foods and household products have remained “stubbornly high” and “Walmart is sick of it,” Sundaram wrote in a research note titled “Walmart Isn’t Happy with Packaged Food Companies.”
“Walmart has recently voiced its concern over persistent inflation in dry grocery and consumable categories, which we believe is a warning shot for CPG companies looking to further raise prices,” he said.
In its fiscal 2024 first quarter, Walmart saw food costs rise by low double digits year over year, while on a two-year stack, food cost inflation for the retail giant topped 20%, Sundaram noted. Meanwhile, most CPG manufacturers have “hovered around” 15% year-over-year price/mix growth since implementing and accelerating price hikes beginning in the summer of 2021, he said.
“It’s clear that Walmart isn’t happy with persistently high levels of packaged food inflation and will look to bring these costs down throughout 2023,” Sundaram stated.
High grocery prices upset Walmart’s mix
The latest Consumer Price Index (CPI) from the U.S. Bureau of Labor Statistics (BLS) had food-at-home inflation up 7.1% year over year in April, down from 8.4% in March and continuing steady decreases since August 2022. On a monthly basis, the food-at-home index dipped 0.2% for April after a 0.3% decrease in March—the first decline since September 2020. Monthly increases in the food-at-home CPI have stayed below 1% since a 0.8% uptick in August.
Four of the six major grocery store food group indices for food-at-home fell on a monthly basis in April, including dairy and related products (-0.7%); fruit and vegetables (-0.5%); meat, poultry, fish and eggs (-0.3%); and non-alcoholic beverages (-0.1%). Cereals, bakery products and “other” food-at-home saw slight price growth, at a rate of 0.2%.
All six food-at-home group indices were up in April on an annual basis (unadjusted), including two by double digits—cereals and bakery at +12.4% and “other” food-at-home at +10.4%, BLS reported. The balance of the 12-month gains were led by nonalcoholic beverages (+9.5%), followed by dairy and related products (+8%); meat, poultry, fish and eggs (+2.8%); and fruit and vegetables (+2%).
Just over a week after the April CPI report, Walmart President and CEO Doug McMillon underscored the company’s concern about the impact of lingering high inflation in center-store categories.
“We continue to manage our price gaps and deliver value for our customers. In Walmart U.S., general merchandise costs are now lower than a year ago, which is great, but they’re still higher than two years ago on like items. In the dry grocery and consumables categories like paper goods, we continue to see high-single-digit to low-double-digit cost inflation. We all need those prices to come down,” McMillon told analysts in a conference call on Walmart’s fiscal 2024 first-quarter results. (Call transcript provided by AlphaSense.)
“The persistently high rates of inflation in these categories lasting for such a long period of time are weighing on some of the families we serve,” he explained. “This stubborn inflation in dry grocery and consumables is one of the key factors creating uncertainty for us in the back half of the year because of the cumulative impact on discretionary spending in other categories, specifically general merchandise.”
McMillon later added, “As we look ahead to Q2 and the rest of the year, we’re focused on getting our merchandise costs and retails down to fight inflation for our customers and members, which will help us with mix.”
High pricing for essential products is sapping consumer spending power for discretionary goods like apparel, electronics, appliances and furniture—key profit-driving categories for Walmart, Sundaram said in his analysis.
“This has never been more evident than in Walmart’s fiscal Q1 results, where the company saw a 360-basis-point year-over-year shift in U.S. sales mix from general merchandise to grocery and health and wellness,” he wrote. “To put this shift into perspective, Walmart saw a 330-basis-point category mix shift for all of 2022. This shift in category mix was the primary reason for Walmart’s slight gross-margin decline in Q1.”
Are manufacturers taking note?
Manufacturers appear to have anticipated the need to scale back price growth, research from CPG/retail sales and marketing firm Advantage Solutions showed. Only 28% of manufacturers polled in March for Advantage’s “Manufacturer and Retailer Outlook Spring 2023” report plan list price hikes in the next six months, down from 46% in the December survey. Thirty-five percent of manufacturers said they aren’t planning increases, up from 28% in the December report.
The ease-up in pricing reflects findings from Advantage’s “Manufacturer and Retailer 2023 Outlook” released in January, in which 46% of retailers expect “significantly fewer” and 44% expect “somewhat fewer” price increases for this year. Forty-eight percent of manufacturers polled for the full-year outlook reported receiving price reduction requests from retailers over the prior six months.
“Given Walmart’s enormous bargaining power over its suppliers, we expect the retail giant to push back on further price increases from its packaged food suppliers. Walmart is the top customer for most packaged food companies, so maintaining a strong relationship with Walmart must be a high priority for those companies,” Sundaram said in his CFRA report.
“Most large packaged food companies under our coverage have 10% to 20% of their annual sales with Walmart, with some having more than 20% exposure. As a result, Walmart has much more bargaining power over its suppliers than its suppliers have with Walmart,” he noted. “If price negotiations turn ugly, Walmart can always allocate more shelf space to another supplier.”
During Walmart’s Investment Community Meeting on Friday, McMillon and Walmart U.S. President and CEO John Furner reiterated the Bentonville, Arkansas-based retailer’s focus on driving value for shoppers.
“Inflation has been really stubborn, particularly in dry grocery. And that is the place where we have seen the most switching to private brand over the last two or three quarters,” Furner said at the event. “[Price] rollbacks are a great way for us to be able to work with suppliers. Sometimes they’re large suppliers; sometimes they’re medium suppliers. But for the situations where we can increase value for customers, and tell them what the value is, we're seeing a lot of response to that.” (Call transcript provided by AlphaSense.)
Rollbacks also could provide a catalyst for discretionary categories, McMillon added. “It’s encouraging that general merchandise pricing has been coming down, and there may be an opportunity there for us to show a value. We’ll use rollbacks as a tactic most of the time to drive more demand than we might be thinking we could drive in the third and fourth quarter this year. So I expect the whole store, not just the food area, to have a strong representation of rollbacks.”