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VIDEO: How the ‘Walmart’ factor will play out in 2024

Supermarket News sat down with Scott Mushkin, founder and managing partner, R5 Capital

Supermarket News sat down with several analysts to look at forward-facing food and retail trends in 2024. In a video interview with Scott Mushkin, founder and managing partner, R5 Capital, Mushkin talks about how competition from Walmart, Aldi, and other low-priced operators might play out in the new year.

Take a watch or read a transcribed excerpt below.

SUPERMARKET NEWS: What do you see as some of the key trends impacting food retailing in 2024?

I think the elephant in the room is what’s going to happen with inflation. If you look at some of our pricing surveys, what’s interesting is that all of a sudden, inflation has almost ground to a complete stop. We were in the Houston market a month or two ago, and over the last six months, there was no inflation at all, and in fact there was a little deflation. We were up in Chicago about a week and a half ago, and low and behold, year over year inflation was falling, and there was deflation.

SCOTT MUSHKIN: I think as we get into 2024, what happens here is really important. Obviously we still have wage pressure out there. A lot of people have been saying it is easier to get labor, but no one is saying it is easy to get labor. So you are still looking at wage increases certainly through the first half of the year, so you have one of these situations where your labor costs are still rising, yet pricing at the shelf looks flattish.

The challenge really is that volumes in the industry continue to be negative, and unfortunately outside of Walmart, everyone has been saying the elasticities have not been what they wished they would be as we stabilize pricing.

So if you look at an industry volume trend of about down 3%, and taking inflation down to zero, that would say people are going to be doing a negative-3 comp unless they are gaining share. This is the overall macro picture for next year, and from our vantage point right now, it’s looking pretty difficult, at least peering into the first quarter.

SN: How might competition from Walmart, Aldi, and other low-priced operators play out in 2024?

SM: I think as you look at competition, the 800-pound gorilla, the 1,600-pound gorilla, the 2,400-pound gorilla is Walmart, Walmart, Walmart. They are gaining a tremendous amount of share. We talked about industry unit volumes being down 3%, but Walmart is up about 1%, according to our research, and this has been the case for a long time now — at least 18 months. That’s shifting a lot of share to the guys in Bentonville, [Ark.], and it’s to the detriment of traditional supermarkets.

Kroger and Walmart compete head to head more than any other two retailers, maybe globally. There’s tremendous overlap in that store base, and it’s hard not to look at Walmart’s share gains and Kroger’s share losses as different sides of the same coin. I don’t know when that stops, and I don’t know how you can run a company losing the share you’re losing.

The competition from Walmart is likely to increase, not decrease. The company is going through a very significant productivity upgrade, technology upgrade, automation upgrade. We would estimate that’s going to improve their productivity by about 30%. Some of that will undoubtedly go into price. When you build these facilities, or build into current facilities, automation and processes, and really drive up your fixed costs, the best thing to do in that situation is to drive a lot of volume over those assets. They have said to me that price is definitely going to be a part of that.

So, as we get into 2024, and more of these automated facilities come on, my guess is Walmart is going to get more aggressive on price to drive volumes. They are already gaining a lot of share, they are likely to use price to gain even more share, where it’s appropriate.

The other thing you have to talk about with Walmart is the Walmart+ offering. The challenge is that Walmart+ is a good offering — it’s not quite on par with Amazon Prime, but it is a good offering. You get Paramount+ with your Walmart+ membership, you get gas discounts, you get travel deals. It seems like almost every two or three days, you get another enticing offer.

We look at Walmart as the guy to beat at this stage, and I’m not sure what stops the share gains. They believe they can gain 100 to 150 basis points of volume share a year, and I think they can do it.

Amazon does not get a lot of play, but we talk to the company frequently, and there is no doubt that they believe they can gain a lot more in-home consumables volume as they drive their delivery times down. And like Walmart, they are putting a lot of fixed assets into place. They are putting machines in place, they are automating, they are using AI.

Our research shows they are already using price very aggressively. A lot of that discounting is going right into the in-home consumables space. Of particular note is health and beauty care — the drugstores are clearly going to suffer. But also things like household chemical and paper, dry grocery — they are cocked, loaded, and aimed at home consumables, and they are driving their delivery times down.

Costco grabs consumables share

Third up on the list of competition that I would throw in is Costco. They continue to grab a lot of share in consumables.

We would peg those three — Walmart, Amazon, and Costco — at about 35% share currently, in the U.S. We already said Walmart wants to add 100 to 150 [basis points], we know what Amazon’s plans are, and Costco is gaining share — so, in five years, is it likely that Walmart, Amazon, and Costco will be 40% of the home consumables market? I’d say that’s highly likely. Could it be 45%? It could.

The other impact is not just the share losses, it’s also the loss of vendor money. Vendor money follows volume, [and] this is an extraordinarily big challenge.

That’s even before we get to Aldi. Let’s take Aldi as a separate entity. Their pricing is extraordinarily cheap. We clock them in as 6% to 10% under Walmart on their private label. They just bought Winn-Dixie down here in Florida, [so] there’s going to be a lot more Aldis here in the state of Florida.

That might also be almost a second-derivative good news for Kroger, because Publix down here has got almost a monopoly, and so to the degree Aldi can hurt Publix’s margins, on the margin, that would probably be helpful to Kroger.

Aldi is just going to grind it out, take share, and if the economy does get worse, they win, so it’s definitely someone to watch.

It’s also interesting to see where they are putting their stores. At least a decade ago, they said we’re not just going to go to lower-income neighborhoods, we’re going to go to middle, we’re going to go to lower middle, and now even they are venturing to what I would say are upper-middle income neighborhoods.

Could Aldi take 50 [basis points] of market share over the next five years? It could.

These are the dynamics in play, and it’s likely to be a very difficult period again for the traditional supermarkets.

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