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The Stockout: No way to mask rising grocery prices

Food prices hit highest rate of growth in 40 years, contributing to falling consumer sentiment

Grocery prices rose 8.6% year-over-year in February. As miserable as the overall 7.9% inflation rate was for most consumers in February, grocery inflation outpaced it, with its highest rate of price growth in 40 years. The February year-over-year increase in grocery inflation exceeded the 7.9% year-over-year growth in January and grocery prices were also up 1.4% in February from January.  

I’ve seen results of consumer surveys that suggest that about 90% of consumers have noticed the rising prices and, in fact, most consumers are overestimating the pace at which food prices are rising. Perhaps that is because consumers are basing their estimates on meat prices, which have risen well into the double digits. With those data points as the background, it is not surprising that consumer sentiment is sitting at a 10-year low per the University of Michigan consumer sentiment data.

What do rising grocery prices mean for CPG companies? The publicly traded CPG companies have touted consumer behavior that has been less price-sensitive than it has been historically, but I expect elasticity going forward to range based on consumer demographic. The affluent consumer segment will likely exhibit few, if any, changes to buying behavior in response to rising grocery prices. Items that cater to that demographic, including health foods and fresh pet foods, have been outpacing other categories, which is why some of the largest CPG companies like Nestle have made numerous corporate transactions to move their revenue mix in that direction. 

Setting aside the expected inelastic demand from high-end consumers, I expect middle- and low-income consumers to respond in a few different ways. First, some consumers will likely decide to eat out less and spend less on entertainment and, as a result, buy more packaged food as a substitute. Restaurant prices are also up about 8% from year-ago levels so the spread in dollars between the average meal out and in has widened. Next, there could be a resurgence in sales of lower-priced private-label brands at the expense of national brands, which would be a reversal of the pandemic-era trend. Third, some consumers will simply buy one or two fewer  more discretionary items, such as buying everything except the Oreos.  

Here are two FreightWaves articles that stood out to me in recent days: one describing what the China COVID spike will mean to shipping and another highlighting domestic intermodal provider J.B. Hunt’s announcement that it will expand its intermodal container fleet by 40% over the next three to five years. 

For shippers that import freight from China, shutdowns could result in changes to recent patterns of fluidity and congestion. For instance, Chinese factory shutdowns could allow for backlogs to ease at the Chinese ports while shutdowns at Chinese port terminals could ease congestion at U.S. ports. But if last year’s shutdown of the Yantian terminal in Shenzhen is any indication, it could only serve to worsen congestion and cause rates to rise once lockdowns are lifted as delayed goods are rushed to market. A potential deterioration in consumer demand is another major factor to consider in the maritime outlook. 

For CPG companies that move freight that is compatible with the domestic rail intermodal network, I expect that the additional containers to be added to J.B. Hunt’s network will be an opportunity to move freight more efficiently (both in terms of cost and fuel) in the coming years. While there is no perfect measurement of domestic intermodal capacity, the number of domestic containers, combined with how quickly those containers are being turned, is perhaps the best way. Presumably, J.B. Hunt has more access to capacity on BNSF, the Class I railroad that J.B. Hunt uses in the western U.S., following decisions by Schneider and Knight-Swift to move their western intermodal business to Union Pacific.  

Domestic intermodal volume from LA to Chicago, J.B. Hunt’s densest intermodal lane, is poised to rise in the coming years as Hunt takes delivery of containers. Chart: SONAR.

Oatly’s share price trajectory in the past year shows that brash marketing can only take a CPG company so far. The Wall Street Journal ran through some of Oatly’s missteps that have contributed to shares falling 75% in the past 12 months. There is also an audio version of the story available for those who get a kick out of hearing the company’s CEO sing, “Wow, No Cow,” in its Super Bowl commercial. Oatly’s challenges included the need to ramp up production to meet rapidly growing demand and fierce competition from larger CPG companies that have taken a portion of Oatly’s market share. As with many CPG companies, Oatly has had to contend with the rising costs of contract manufacturing. Oatly relies on contract manufacturing for much of its output and not only have contract manufacturing costs risen, but the company’s competition for those services increased as more oat milk competitors emerged.

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The FREIGHTWAVES TOP 500 For-Hire Carriers list includes J.B. Hunt (No. 4) and Schneider (No. 7).

Michael Baudendistel

Mike Baudendistel is an analyst and Market Expert at FreightWaves focusing on the railroad, intermodal and transportation equipment industries. Prior to joining FreightWaves, Baudendistel served as a senior sell-side equity research analyst covering the publicly traded railroads, suppliers that manufacture and lease railroad equipment, and suppliers that manufacture trucks, trailers, engines and other components. He has 14 years of experience following the freight transportation industry with experience that also touched the truckload, Jones Act barge and domestic logistics industries. He is a CFA Charterholder.