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Experts Share Ways Market Can Keep Profitability Post Pandemic

Karen Short and Scott Moses

Last updated on March 15th, 2023 at 03:04 pm

During the recent FMI Midwinter Executive Conference, two experts discussed how the grocery market can sustain its profitability as the nation moves further from the COVID-19 pandemic.

Karen Short is managing director for Credit Suisse, while Scott Moses serves as managing director and head of food retail and restaurants investment banking for Solomon Partners.

The discussion began with trends since 2019 and the onset of inflation. Short pointed out that consumers are seeking ways to save money and grocers need to accommodate them. She mentioned private label as appealing. 

However, retailers like Walmart and Target – which saw a massive influx in profits – won’t be able to sustain that success as price gaps increase, according to Short.

Moses expounded on retailers’ struggles by highlighting the shrinking workforce.

“There are 10 million jobs available in the United States and only six million job seekers. That’s a four million worker debt,” he said. “Normally, it’s the other way around. That shifts the labor supply demand…and as a consequence, interest rates have downward pressure. That’s what we experienced from basically 2008 until the last couple of years.”

The cause of the labor shortage stems from the pandemic, when about 500,000 working-age Americans left their jobs never to return. To compound that, immigration rates have dropped, which further lowers the labor force. 

“We’ve got at least a million fewer people in the labor force because the immigration rate has slowed somewhat since 2017,” he said.

Short shifted the conversation to lower-end retail. These formats are starting to see higher margins as prices continue to increase. She cited Walmart’s lower profitability, according to her company’s data, which focuses on average basket size. 

“The pay scales have never been wider…every time in every city that we look at, there are identical basket sizes. When I check, these are identical baskets in Walmart, Target and Amazon – so they’re all neck and neck. This is not a sustainable situation,” she said. 

And it comes from the market share that Walmart and other retailers lost following the pandemic. The ups and downs of profitability have been more drastic, Short said. Now as the margins of profit continue to widen, supply chain and inventory gaps are just “putting salt in the wounds.”

Conversely, due to growing prices, companies that customers feel offer a greater value seem more appealing, according to Moses. For example, Costco and Dollar General have continued to expand and gain traction. He cited Costco’s $2.9 million weekly grocery sales.

“That figure is three times an exceptional supermarket and about six or seven times the average,” he explained. “Oh, by the way, it was worth about $200 billion, which is about 25 percent more than all publicly traded supermarkets and suppliers combined. On the other end of the spectrum, you’ve got Dollar General.”

The Tennessee-based retailer has added more than 1,000 stores in the past few years for about 19,000 total, according to Moses. The company expects to have 34,000 by 2030.

“Mind you, there’s only about 26,000 super­markets left. So they continue to gain significantly. Now, how are these guys doing all that? It’s really a capital dynamic, which is a proxy for customer acquisition and retention.”

He said about 60 percent of a company’s credit rating is determined by pay scale. “Higher sales, the better your rating,” he said. This leads to less overall debt, which when paired with steady customer interest, enables Dollar General to diversify and expand. He likened the situation to Amazon’s overall business model.

Amazon has become the fifth largest grocer, Moses said. But that is just a small portion of the company’s business. And though Amazon has seen its overall evaluation decline and continues to lay off employees, it is moving more products than any other company. 

“They are still working two times Walmart, about 20 times Kroger, about 50 times Albertsons and about 480 times Ingles. Which I think is a good proxy for regional gross across the country…Ingles does about $5 billion in revenue. It’s worth about $2 billion. By any measure on an average basis, it is a huge company in this industry.”

He continued by highlighting other services Amazon provides that help lower the price gap grocery retailers are feeling. Other larger chains such as Walmart are seeing the success of a diversified business and expanding their internal networks to help offset some of the rising costs, he said.

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