Key Points:
- Ahold and Publix reported softer grocery comps for the Q2 period, reflecting share loss to value, club, general merchants, and Amazon. Costco’s July comp-sales were once again-- best-in-class.
- Given increasing retailer “targeted” price cuts, channel shifts, business model changes, and changes to pharmacy and medicines (GLP-1s), it’s becoming increasingly difficult to track market share, competitive intensity / encroachment, and retailer unit economics. In other words, there’s rising uncertainty to what the “grocery industry” will look like five to ten years from now.
- We continue to think that rising uncertainty about the conventional grocery business model / proposition will become a larger part of the conversation in grocery-anchored REITs. It’s not a robust discussion yet, just as GLP-1s and Big Food wasn’t a robust discussion as recently as 2024; it is now robust and seismic.
Following soft results from Albertsons Companies, both Ahold and Publix reported soft US comp-sales as well. In the context of PCE FAH* growing +3.0%, Ahold’s adjusted US comp-sales increased only +1.6%, and Publix, about +0.2% when excluding the changes affecting pharmacy reimbursement. In this week’s 2H outlook, Consumer Spending Heading into the 2H: Swinging higher like Spidey, we noted that the actions by Walmart / Target / etc. to lower prices to demonstrate greater value to customers / “observers” was showing up in a lower overall $-basket size. Walmart, Target, Albertsons and Kroger are also “showing” greater value in their private brands. Ahold is doing similarly, with its CEO Frans Muller saying, ‘Stop & Shop lowered everyday prices across all 137 stores in New York and New Jersey. All Stop & Shop locations now have the price investments in place. Hannaford has priced more than 3,500 key value items in its own brand assortment at parity with leading competitors.” (Management’s plan is $1B back into lowered prices over 4 years.)
Another concern for both Food Lion and Publix that we see in our data is that the mid-week period (Tuesday-Thursday) visits underperformed total-week; mid-week is the occasion that Walmart store-delivery and Amazon perishables are picking away at. What Food Lion / Publix stand on as their differentiation / moat is ease-of-pick and convenience. And so, should their mid-week period decline, that would demonstrate that their competitive moat has been breached.
As all these retailers are lowering prices (selectively), it makes it harder to measure the movement in underlying market share and the industry’s level of competitive intensity (up or down, “concerning” or a “problem”). The impact on gross margins is obscured by retail media dollars, company-specific efficiency initiatives, and tariff refunds which are funding the price rollbacks. Interestingly, Muller also said, “Where you could argue that the out-of-home statistics on CPI food at home is 2.7% in the quarter in June. Our own internal inflation was much lower. If I would indicate that's roughly about 1% our internal inflation. And that has to do, of course, with our price investments at the same time… The second thing is that if you look at our total composition of the sales, that composition is also changing. If you look at the mix of own brands and national brands, also the benefit of our own brand development as well also there in the U.S., 70 basis points growth in the own brands assortment. So that means also that gives you also a different mix. And that mix is a beneficial mix, which comes to customers, and that's exactly why customers love our own brands.” Also muddling the picture is the sales at Aldi, Trader Joe’s, Grocery Outlet, and a lot of Amazon are not captured by POS scanner data. This is why we use PCE FAH to judge market growth. All the confusion and the challenges to CPIs (and the PCE price component) are good reasons for the companies to start reporting units of volume.
In our outlook, we also previewed Costco to have had a very strong July. They did, with the US at +6.9% ex-gas, driven by ticket and traffic (+3.3% vs. +3.2% in June); however, the only +10bps of acceleration was less than we expected based upon observed traffic, which was +100bps MoM. And so, what’s going on? Well, Costco is reporting “transactions” and not traffic. While a member does have to present their card at the door, a “family” can enter with a member visit. (Two+ visitors vs one visit.) Maybe there was more brotherly / sisterly love in July? Other noise comes from the lap of last July’s extended store hours for executive members and an additional hour for all members. The extension also makes the comp more difficult, but Costco’s disruptive value was up to the challenge, and the 2-yr traffic CAGR accelerated to +3.8%, the highest figure since April. Given that we think Costco is at most +100bps in price, that would put the comp-volume in grocery at +3.5%, which we believe is driven by positive UPT and positive transactions. But the big picture, on a comp-basis, Costco is growing at >2X the market rate. That’s a lot of volume transferring from conventional grocery to club.
This week, Eli Lilly reported Q2 revenue growth of +48%, and they raised their full-year outlook (+$2.5B more in sales). U. On Lilly’s Foundayo (it’s pill version) and new indications, CFO Lucas Montarce said, “The U.S. launch is progressing well. Total prescriptions and share of new patients continue to grow, as we're increasing our investments to drive brand awareness among physicians and consumers. The recent launch of the Medicare GLP-1 Bridge program is an opportunity to expand the oral market, unlocking access for eligible seniors with a low out-of-pocket cost… We also expect readouts of many additional clinical trials. The first readout, in obstructive sleep apnea, will come later this year… As a small molecule that can be produced at scale, Foundayo has the potential to help millions of people improve their cardiometabolic health.“ Phase 2 work is underway for IBS and Crohn’s.” Here at Advan, we are awaiting the start up of Lilly’s new Zepbound plant in Lehigh Valley, Pennsylvania, where we will be monitoring the ramp-up activity (workers and delivery trucks).
As a reminder, the Bridge program launched on July 1 and about 20M seniors are eligible at a cost of $50/mo. For the program, Lilly is doing extensive education across consumers, physicians, and pharmacies and has enabled LillyDirect to fulfill prescriptions. Following the launch, volume nearly doubling MoM, i.e. there’s a lot more change coming for food consumption going into the 2H.
Costco had comments on GLPs back in May with CFO Gary Millerchip saying:“I think in terms of GLP-1s, the biggest thing we're seeing, of course, is that the value that we're offering in our pharmacy is really helping members take advantage of those drugs in a very cost-effective way. I think I called out in our prepared remarks, one of the things that we're seeing in food and sundries where … every kind of anything protein right now is doing extremely well. So protein snacks, protein bars, beef sticks. We launched our own Kirkland Signature Beef Stick that's doing tremendous volume and offering tremendous value to our members. So that's an example of an area where we're really leaning into those items because of what we're seeing with our members and the value and quality they're looking for.”
And Costco CEO Ron Vachris:“We just launched a Kirkland Signature Ultra Filtered Protein Milk in our dairy that has just taken off extremely, extremely strong, things with fiber, magnesium. So I think our buyers are right on top of the halo effect of GLPs and the needs of the members. And I'm quite impressed with what I'm seeing from the CPGs, the rather big ones, and how they're pivoting to the future potential opportunities there.”
This week, we also heard from Uber, DoorDash, and Instacart (Ahold delivered +15% e-commerce growth in the US, Albertsons, +13% to 10.5% of sales). 3P delivery is starting to have more of an impact (size-wise) on the grocery basket and foot traffic. On agentic, Dash CEO Tony Xu said, “One of the more recent products we launched was called DoorDash Ask, which is an ordering agent that helps customers discover restaurants that are similar to ones that they've ordered in the past, but that are new to them, that helps them build a grocery cart in under two minutes.” And it also provided the following chart, and as highlighted, this year’s $-numerator growth (the “size-wise”) was nicely ahead of last year's. Similarly, as shown, Instacart’s volume is accelerating; Q2 YoY $ growth of +$1.3B is 1.4X larger than LY’s $0.9B.
On the topics of agentic and value, Instacart CEO Chris Rogers said:
“Our data advantage is helping us build the gold standard in agentic grocery shopping. Our AI assistant doesn't simply recommend recipes or generic product pairings. It understands the customer's preferences, recent purchase history, what's actually available at nearby stores and current promotions. It then turns those insights into an order that's ready to be placed and delivered in as fast as an hour. Customers are already using our AI Assistant to quickly restock their essentials, find deals and discounts, order ingredients from recipe suggestions, discover new products, and plan meals. Orders placed with our AI assistant are, on average, larger than our typical basket... We're excited to build on this momentum and launch our AI assistant across our marketplace in North America over the next several weeks.We remain focused on affordability, which we know is one of our biggest opportunities to accelerate online grocery adoption. Retailers that offer no markups on item prices continue to drive faster growth and stronger customer retention. Instacart already has more retailers offering online grocery delivery with no markups than any other third-party marketplace in North America, and we're continuing to extend that advantage. Grocery Outlet is eliminating markups nationwide across our marketplace alongside regional favorites like Strack & Van Til and Super King Markets.”
This week, what did the REITS have to say on the industry changes, Phillips Edison CEO Jeff Edison said:
“I mean you hear what Walmart is doing, you hear what Kroger is doing. They're reinvesting in price, and they're doing that specifically because they are sensing some consumer weakness on the -- and they know it like in real time because they're looking at them trading to private label from a branded more expensive product. And so they're watching this happen. And when you see them start to talk about investing in price, that's what they're focused on. Fortunately, we -- if you look at our performance, we had -- if you look at foot traffic, we had 2% increase in foot traffic in June. We had the same thing year-to-date is up about 2%. So there -- we're not seeing it on the ground, but it's certainly something that you're going to -- we're going to want to keep a look at. And we'll be watching as that moves forward.”
(Yes, traffic is up, but part of that is 1P or 3P delivery and not full-center shop. And so, we’ll be observing closely in the quarters ahead.)
And Regency CEO Lisa Palmer:
“I've been in the business a really long time, and the grocery business has always been extremely competitive through decades of my experience, and it continues to be so and even more so today. And the best physical locations with the better operators are going to continue to be critical to the entire grocery sector… I'll remind you that there was even more concern pre-COVID and then coming through COVID, a renewed appreciation for that physical location. And the grocers understand that they need to invest in every aspect of the business from an omnichannel standpoint, and we're seeing that happen. We -- so from our perspective, specifically, we haven't seen anything in our portfolio or in our close relationships and conversations with our grocers that would give us any pause or change our view of grocery whatsoever. We are in active dialogue. And while it is a really, really competitive environment, we believe that operating with -- owning the best real estate, operating with the best grocer banners in those markets is a winning long-term strategy.”
For other thoughts on how, and how fast, the grocery aisles need to change see Albertsons’ CEO Susan Morris’ comments. To the point of all of the above and Morris’s comments, this week, Kraft-Heinz reported a -3.8% decline in Q2 volumes for its North American segment; that puts volume down 20% from 2019’s levels, which is -500bps worse QoQ.
