Shoppers getting squeezed into bigger boxes

While Food at Home inflation has moderated from highs seen in 2022, consumers continue to feel the pressure of grocery prices, which are nearly 30% higher than those of pre-pandemic levels. Housing and services inflation has slowed recently but still remains elevated vs. pre-Covid. We believe “wallet shift” owing to elevated prices in items that people need could continue to pressure spending on more discretionary (and typically higher-margin) items and services.

 

This could be a challenge for Food Retailers that are not competitively priced and favors market-share gains for Broadline retailers (including discount stores and warehouse clubs) that offer competitive pricing across grocery, consumable and discretionary categories. We also believe share gains for well-positioned Food Retailers could be especially sticky as online grocery grows in terms of its affordability and accessibility to the U.S. population.

 

Over the next 5 years, the U.S. population is expected to add 7.8 million more people to the 65+ age group. Retirees on fixed incomes historically have tended to shop warehouse clubs and discount stores due to their low prices. There is also a meaningful, but less dramatic, increase expected in the 35-to-44-year-old age group, implying an increase in purchases associated with household formations and starting families. Interestingly, growth of this 35-to-44-year-old age demographic also has a strong historical correlation with growth in trading volume of small cap stocks (as measured by the Russell 2500 Index).

 

Retailers best positioned to benefit from these changing demographics, in our view, include omnichannel Broadline retailers that can cater to the aging population with quick delivery of attractively priced groceries, a broad selection of discounted general merchandise and pharmacy offerings as well. A growing group of time-constrained Millennials struggling with work/life balance and the rising costs of Household & Family formation may also increasingly rely on omnichannel discount stores and warehouse clubs. Broadline retailers could benefit the most as their rapidly developing capabilities in same-day delivery (3 hours or less), expanding third-party online marketplace offerings and continued low-price leadership drive customer traffic and wallet-share gains, especially with higher-income ($100K+) customers.