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Inflation-weary consumers got another dose of bad news with the January CPI report. The index ticked up by a greater-than-expected 0.3% in January with the food category posting a gain of 0.4%. This included a 0.5% gain for the food-away-from-home category and 0.4% gain for the food-at-home (FAH) category. Year-over-year, these two categories were up 5.1% and 1.2%, respectively (versus 3.1% for the overall CPI).
So, while some categories of the CPI are contracting year-over-year (energy is down 4.6%), food prices remain stubbornly high.
Fortunately for those who like to eat dinner in front of the TV, a study by KeyBanc suggests the economy is entering a “once-in-a-decade” event for the FAH category. The last time this occurred (2016-2017) falling input prices, increased production rates, and a favorable exchange rate drove FAH down 1.3%. Not too dramatic when you consider that prices for corn, wheat, soybeans, meat, eggs, milk and diesel were down a collective 12.1%.
But for every 1% decline in food prices, consumer spending increases $1B per month.
What makes this year different from the last 4 years? After peaking at 5% overall inflation has been moderating and USDA forecasts and along with manufacturers outlook suggests FAH could be negative in 2024. By extrapolating previous data, KeyBanc estimates that this deflationary period will occur by July 2024.
During the last deflationary cycle, Walmart (NYSE:WMT) was the primary beneficiary, according to KeyBanc, with other retailers like Target (TGT), Dollar Tree (DLTR), Dollar General (DG), Ollie’s (OLLI) and Big Lots (BIG) seeing only marginal gains. This can be attributed to increased traffic which also contributes to the gains in general merchandise sales as well. Since FAH represents 7% of personal consumption expenditures for the general population and increases to 10-14% PCE for lower income individuals, the benefit to Walmart (WMT) is more pronounced than for other retailers.
For grocery retailers, food deflation has historically pressured comp sales. Data compiled by KeyBanc shows that from the period between Q1 2016 and Q3 2017, FAH deflation fluctuated between -2.1% and 0.8%. The average comp sales for Walmart (WMT), Costco (COST), Kroger (KR), Sprouts (SFM), and Publix fluctuated from 2.5% and 0.8%.
But isolating the impact on just Walmart (WMT) the data shows that comp sales for Walmart remained relatively steady. So, while Kroger (KR) experienced a 0.7% contraction in comp sales, Walmart (WMT) sales were at 2.0%. While Publix was down 2.1%, Walmart (WMT) remained at 2.0%.
Walmart’s non-food sales also outperformed competitors during the food deflationary cycle. During the 2016-2017 period, Walmart’s general merchandise sales growth remained positive while sales growth at Target (TGT) declined during the same period.
“Looking forward, we believe Walmart could see continued share gains in food, but also improved spending in discretionary categories, which are higher margin,” KeyBanc said in their report.
Looking at past quarterly data for Walmart, during the last two quarters of 2016, Walmart reported comp sales of 1.5% and comp sales for its grocery-only Neighborhood stores of 8.0%. In Q4, this fell modestly to +0.6%, and +7.0%, respectively, but was still elevated from pre-deflationary periods.
By comparison, the two years prior to the deflationary period, Walmart’s comp sales in Q3 2014 were negative 0.3% and +3.4% for the Neighborhood store. By Q3 2015, this improved to +0.5% in comp sales and +5.5% for the Neighborhood stores, still well below levels seen just a year later.
Price deflation will be a welcome relief to consumers and a potential boon to retailers like Walmart (WMT). How the company performs during this cycle is uncertain, but evidence suggests the impact from lower food prices could start to bolster sales as early as this summer.
Walmart reports Q4 results before the open on Feb. 20. Last quarter, the company beat EPS estimates by a penny and sales by $895M.