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In January, the Consumer Price Index (CPI) revealed a disheartening 0.3% spike, leaving inflation-weary consumers grappling with the harsh reality of rising prices. Of particular concern was the 0.4% gain in the food category, encompassing a 0.5% surge for the food-away-from-home category and a corresponding 0.4% increase for the food-at-home (FAH) category. Notably, these figures reflected a 5.1% increase year-over-year in food-away-from-home prices and a 1.2% uptick in food-at-home prices, compared to the overall 3.1% surge in the CPI.
While some sectors of the CPI have seen year-over-year contractions, the stubbornly high food prices continue to burden consumers.
KeyBanc’s study offers a glimmer of hope to those partial to home-cooked meals, suggesting that the economy is on the cusp of a “once-in-a-decade” event for the food-at-home category. The last occurrence, from 2016 to 2017, witnessed falling input prices, escalated production rates, and a favorable exchange rate, culminating in a 1.3% decrease in food-at-home prices. Notably, this period coincided with a collective 12.1% decline in prices for staple commodities such as corn, wheat, soybeans, meat, eggs, milk, and diesel.
The numbers speak volumes—a mere 1% dip in food prices translates to a staggering $1 billion surge in consumer spending each month.
What sets this year apart from the last four years? After reaching a 5% peak, overall inflation has been on a downward trajectory. Forecasts from the U.S. Department of Agriculture and manufacturer outlooks hint at the possibility of food-at-home prices reversing into negative territory by 2024. Drawing from historical data, KeyBanc extrapolates that this deflationary phase could materialize as soon as July 2024.
The Impending Retail Landscape
During the previous deflationary cycle, Walmart (NYSE:WMT) emerged as the primary beneficiary, while other retailers such as Target (TGT), Dollar Tree (DLTR), Dollar General (DG), Ollie’s (OLLI), and Big Lots (BIG) witnessed only marginal gains. The surge in foot traffic contributed to more than just a spike in general merchandise sales; it elevated Walmart’s advantage, particularly since food-at-home represents 7% of personal consumption expenditures (PCE) for the general populace, and escalates to 10-14% for lower-income individuals.
For grocery retailers, food deflation historically exerted pressure on comparable sales. Records compiled by KeyBanc show that between Q1 2016 and Q3 2017, food-at-home deflation fluctuated between -2.1% and 0.8%. During this period, average comparable sales for Walmart (WMT), Costco (COST), Kroger (KR), Sprouts (SFM), and Publix vacillated between 2.5% and 0.8%.
Scrutinizing the effects on Walmart (WMT) alone, the data underlines a consistent pattern. While Kroger (KR) suffered a 0.7% decline in comparable sales, Walmart (WMT) maintained a solid 2.0%. Similarly, as Publix witnessed a 2.1% dip, Walmart (WMT) stood firm at 2.0%.
Walmart’s Potential for Growth
Walmart’s non-food sales outshone competitors during the previous food deflationary cycle. In the 2016-2017 period, its general merchandise sales growth retained positivity, whereas Target (TGT) faced a decline during the same phase.
Reviewing Walmart’s quarterly data reveals noteworthy trends. In the last two quarters of 2016, Walmart reported comparable sales of 1.5%, with its grocery-only Neighborhood stores posting a remarkable 8.0%. Although these figures moderated marginally to +0.6% and +7.0%, respectively, in Q4, they still surpassed pre-deflationary levels.
Comparatively, the two years antecedent to the deflationary period showed less encouraging figures. In Q3 2014, Walmart’s comparable sales reflected a 0.3% decline, with the Neighborhood stores at +3.4%. By Q3 2015, these numbers improved to +0.5% for comparable sales and +5.5% for the Neighborhood stores, albeit remaining notably lower than the subsequent year.
Looking Ahead
Price deflation promises a reprieve for consumers and a potential windfall for retailers like Walmart (WMT). While the company’s performance during this cycle remains uncertain, evidence indicates that the impact of lower food prices could begin fortifying sales as early as this summer.
Walmart is scheduled to release its Q4 results before the market opens on Feb. 20, following a quarter wherein it exceeded EPS estimates by a penny and surpassed sales projections by $895 million.
