Pardon the Disruption: Why grocery chains are outperforming expectations amid inflation

Grocers like a little bit of inflation in their business. Kroger CEO Rodney McMullen has said somewhere between 3% and 4% is optimal. That’s enough of an increase to pad out the top line, but not enough to send shoppers running for the hills.

But the sort of food inflation we’ve been seeing this year, which has crept up into the double digits in recent months, carries a significant amount of risk. Yes, those higher prices can boost sales. They can also push shoppers toward discount operators that are waiting with open arms.

As prices have gone up and up, I keep feeling like we’re going to see a mass exodus of consumers from the Krogers and Albertsons of the industry to retailers like Walmart, Grocery Outlet, Dollar General and Aldi. These low-price stores are everywhere now and, as Aldi has shown with its recent remodeling push, they’re targeting shoppers across income levels.

That exodus hasn’t happened, though. Yesterday, Ahold Delhaize reported topline results that exceeded expectations. This included a healthy 6.4% comps increase among its six U.S. banners. Natalie Knight, the company’s chief financial officer, said it has actually gained sales momentum as the year has gone along and prices have risen. Those results followed an 7.8% comps increase from Publix earlier this month and a 6.8% increase reported by Albertsons late last month.

These are not eye-popping financials like what we saw earlier in the pandemic, when locked-down customers were doing most of their food shopping with grocers. But they’re very solid, and indicate that grocery chains are keeping a lot of their price-weary customers shopping inside their stores and on their apps.

So what explains this outperformance on the part of grocers? Price increases alone don’t account for the sales and traffic increases we’re seeing.

There are some significant structural advantages that are playing in grocers’ favor. Well over two years into the pandemic, a lot of people are still working from home as companies have adjusted their policies. According to a recent McKinsey survey, 58% of U.S. jobholders — equivalent to 92 million people — have the option of working remotely at least one day a week. Thirty-five percent say they have the option of working remotely five days a week.

Some CEOs have claimed millions of consumers rediscovered their love of cooking during the pandemic — which is about as believable as me becoming the next executive chef at Per Se. The widespread acceptance of remote work, however, is a much more plausible driver of at-home eating. Albertsons’ CEO Vivek Sankaran cited the work-from-home trend a couple times during the company’s most recent earnings call, noting the company’s stores offer all the prepared foods and lunch-making ingredients people are looking for.

Another structural benefit is a stronger-than-anticipated American consumer, said Krishnakumar Davey, president of client engagement with industry research firm IRI, which closely tracks consumer, retailer and manufacturer trends. Like me, he predicted early in the year that demand at grocery stores would be lower than what we’ve seen.

“With all the pricing increases, people feared there’d be more trading down and doing without, but it hasn’t really panned out,” he told me this week.

Certainly, high prices at the grocery store and at the pump are frustrating consumers and spurring them to trade down in many instances and hunt for bargains.

But overall grocery spending hasn’t changed all that much to this point. Andy Harig, vice president of tax, trade, sustainability and policy development with the Food Industry Association (FMI), said during a media briefing Wednesday that middle and upper-income shoppers haven’t really altered their weekly spending, while low-income families are actively trading down to lower-price goods. FMI data shows households are spending an average of $136 a week on groceries, down around 8% from the $148 per week they reported spending in February.