Early View CPG Off to a Slow Start, but What s Next?

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Dale Goodwin
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1 Early View 2017 CPG Off to a Slow Start, but What s Next? May 2017

2 Executive Summary January and February are typically softer months for CPG and edibles, but 2017 is showing sharper-than-normal declines. March posted improvement but not recovery. Department-level trends were mixed, with beverage and liquor being most sheltered from declines and frozen and refrigerated feeling the brunt of the slide. Perimeter sales are being negatively impacted by weak performance in meat and produce. The stumble is impacting all regions, but California has been slower to recover than other areas. Declines are being driven by a number of complex and interwoven factors, which are negatively impacting trips and basket size. Soft trends are evidenced across consumer segments, but some groups have been more harshly impacted than others. Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 2

3 Consumers entered 2017 facing a set of complex and intertwined market dynamics, which set off uncertainty and resultant conservative CPG behaviors. Economic Shifts Delays in Tax Refunds Irregular Weather Patterns Food Pricing Complex and Evolving Marketplace Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 3

4 Unemployment fell in 2016 and retail sales climbed. Meanwhile GDP slipped and inflation ticked up. ECONOMIC SHIFTS Economic Measure GDP (% chg) 1.7% -2.0% 3.8% 3.7% 4.1% 3.3% 4.2% 3.7% 3.0% Unemployment (%, SA) 5.8% 9.3% 9.6% 8.9% 8.1% 7.4% 6.2% 5.3% 4.9% Consumer Price Inflation (% Chg) 3.8% -0.3% 1.6% 3.1% 2.1% 1.5% 1.6% 0.1% 1.3% Retail Sales (% Chg) -1.3% -7.2% 5.4% 7.3% 4.9% 3.8% 4.1% 2.3% 3.0% Residential Permits, Total (Mil) Source: Moody s Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 4

5 Weather patterns have been erratic, impacting shopper budgets and economic performance. WEATHER PATTERNS Relative Temperature vs. YA Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 5

6 The at-home food sector experienced volatile prices, with some major categories such as eggs and meats seeing prices drop precipitously. FOOD PRICING Source: Food Institute; Bureau of Labor Statistics Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 6

7 Competition with alternative food sources is mixed and evolving. EVOLVING MARKETPLACE Food dollars are nearly evenly split between at-home and away-from-home occasions Out-of-home eating has been stagnant for several years QSR visits are expected to increase 1% in 2017 (flat 2016) Full-service visits are expected to decline 2% Net: restaurant traffic predicted to be flat U.S. meal kit delivery market (~ $1.5 billion in 2016) will grow sharply, with some projections estimating as much as $5 billion market within five years Source: NPD; Packaged Facts. Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 7

8 While CPGs rely heavily on merchandising to move product, lift from merchandising efforts is on the decline. Change in Lift from Merchandising, Any Tactic Edible Department-level trends vary Refrigerated is lagging Frozen is generally outperforming Beverage, general food and liquor are on par Source: IRI Market Advantage, 4 weeks ended 3/19/2017, 2/19/2017, 1/22/2017 and same periods prior two years; MULOC. Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 8

9 Many consumers continue to struggle financially. Consumer Financial Health Total Population Making sacrifices to make ends meet 49% 50% Household financial health is strained 45% 45% Having difficulty affording needed groceries 28% 29% Q12016 Q12017 Source: Consumer Connect, Q Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 9

10 Lower-income and younger shoppers are among the hardest hit. Consumer Financial Health by Income Consumer Financial Health by Generation Making sacrifices to make ends meet Household financial health is strained 23% 41% 58% 73% 50% 16% 34% 50% 71% 45% $100K> $55-$99K $35-$54K <$35K Total Population Making sacrifices to make ends meet Household financial health is strained 39% 54% 53% 55% 50% 35% 49% 43% 49% 45% Seniors Boomers Gen X Millennials Total Population Having difficulty affording needed groceries 6% 18% 33% 54% 29% Having difficulty affording needed groceries 21% 33% 26% 33% 29% Source: Consumer Connect, Q Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 10

11 This is encouraging avid deal-seeking behavior and shifts in brand loyalty. Consumer Buying Behaviors Total Population Generally buy the lowest price item when buying groceries 60% 58% Often buy food/beverage brands other than my preferred brand because they're on sale 57% 58% Often buy food/beverage brands other than my preferred brand because I have a coupon 47% 46% Q Q Source: Consumer Connect, Q & Q Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 11

12 Trade-offs are most prevalent among younger and less wealthy shoppers, least prevalent across seniors and the wealthiest households. Consumer Buying Behaviors by Income Consumer Buying Behaviors by Generation Generally buy the lowest price item when buying groceries Often buy food/beverage brands other than my preferred brand because they're on sale 35% 60% 62% 70% 58% 44% 55% 62% 67% 58% $100K> $55-$99K $35-$54K <$35K Total Population Generally buy the lowest price item when buying groceries Often buy food/beverage brands other than my preferred brand because they're on sale 50% 55% 61% 71% 58% 44% 56% 63% 72% 58% Seniors Boomers Gen X Millennials Total Population Often buy food/beverage brands other than my preferred brand because I have a coupon 35% 49% 50% 51% 46% Often buy food/beverage brands other than my preferred brand because I have a coupon 37% 45% 53% 55% 46% Source: Consumer Connect, Q Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 12

13 Consumers are embracing a wide variety of money-saving opportunities; online price comparisons are becoming more popular. Shopping Journey Money-Saving Preparations Top 2 Box Total Population Buy private label options Try new, lower-priced brands 83% 81% 75% 74% Visit multiple retailers Download coupons from retailer/manufacturer website Compare prices on area retailers' websites 56% 58% 50% 53% 46% 50% Q Q Source: Consumer Connect, Q & Q Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 13

14 Millennials are most likely to make brand concessions; Gen X consumers are as likely as millennials to seek digital savings opportunities. Shopping Journey Money-Saving Preparations Top 2 Box by Income Buy private label options Try new, lower-priced brands Visit multiple retailers Download coupons from retailer/manufacturer website Compare prices on area retailers' websites 73% 85% 82% 84% 81% 61% 76% 77% 80% 74% 50% 61% 60% 60% 58% 51% 52% 56% 55% 53% 43% 51% 50% 53% 50% $100K> $55-$99K $35-$54K <$35K Total Population Shopping Journey Money-Saving Preparations Top 2 Box by Generation Buy private label options Try new, lower-priced brands Visit multiple retailers Download coupons from retailer/manufacturer website Compare prices on area retailers' websites 78% 79% 82% 89% 81% 62% 72% 79% 86% 74% 52% 59% 63% 60% 58% 41% 53% 60% 62% 53% 37% 50% 60% 55% 50% Seniors Boomers Gen X Millennials Total Population Source: Consumer Connect, Q Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 14

15 Conservative behaviors pushed unit sales down precipitously in January of this year, negatively impacting dollar sales trends; subsequent months have seen improvements, but not growth. Monthly Dollar Sales Change Total CPG Monthly Unit Sales Change Total CPG 3.5% 3.2% 4.1% 3.1% 2.1% 1.6% 1.3% 0.6% 0.8% 0.5% 0.7% 0.6% -0.6% -1.5% % -1.3% -0.5% -2.6% Source: IRI Market Advantage, 4 weeks ended 3/19/2017, 2/19/2017, 1/22/2017 and same periods prior two years; MULOC. Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 15

16 Trends in edibles are similar, but with a more drastic drop in January and a stronger rebound in subsequent months. Monthly Dollar Sales Change Total Edible Monthly Unit Sales Change Total Edible 4.2% 3.2% 3.2% 3.1% 1.3% 0.8% 0.0% 1.8% 1.2% 0.6% 0.4% -0.4%-0.5% -1.3% -1.1% -0.5% -2.3% -3.0% Source: IRI Market Advantage, 4 weeks ended 3/19/2017, 2/19/2017, 1/22/2017 and same periods prior two years; MULOC. Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 16

17 The grocery channel experienced sharper-than-average declines and a softer rebound versus the industry as a whole. Monthly Dollar Sales Change Total CPG Monthly Unit Sales Change Total CPG 3.5% 3.4% 2.0% 2.2% 0.8% 0.5% 2.1% -0.8% -1.1% -2.8% % 0.2% -1.7% -1.9% -0.4% -0.2% -0.6% -4.0% Source: IRI Market Advantage, 4 weeks ended 3/19/2017, 2/19/2017, 1/22/2017 and same periods prior two years; Food Only. Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 17

18 Channel trends are similar within grocery edibles aisles. Monthly Dollar Sales Change Total Edible Monthly Unit Sales Change Total Edible 3.5% 3.5% 1.9% 2.1% 2.3% 0.6% 0.5% 0.1% -1.0% -1.2% -0.1% -0.6% -0.5% -3.1% -1.8% -1.8% -1.8% -4.1% Source: IRI Market Advantage, 4 weeks ended 3/19/2017, 2/19/2017, 1/22/2017 and same periods prior two years; Food only. Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 18

19 Frozen and refrigerated departments experienced the sharpest dollar sales drop in January; all departments except general food posted positive March growth. Monthly Dollar Sales Change by Department 5.5% 5.2% 4.4% 2.7% 2.9% 2.1% 0.8% 0.7% 1.2% 1.6% 1.6% 3.9% 1.7% 2.5% 1.4% 3.5% 2.6% 1.9% 1.7% Beverage -1.0% -3.0% -4.0% -2.1% Frozen -0.5% -0.5% -0.1% -2.9% General Food 6.0% 6.6% 5.0% 4.0% 4.2% 4.5% 1.9% 2.2% 0.4% Liquor 5.1% 5.9% 3.9% 2.4% 0.5% -0.1% -1.4% -2.2% -4.4% Refrigerated Source: IRI Market Advantage, 4 weeks ended 3/19/2017, 2/19/2017, 1/22/2017 and same periods prior two years; Food only. Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 19

20 Liquor units maintained low-level positive growth throughout Q1, while other departments saw units fall. Monthly Unit Sales Change by Department 2.7% 2.8% 2.6% 2.0% 1.0% 1.3% 0.6% 0.7% 0.1% 0.2% 1.6% 0.6% -0.6% -0.3% Beverage -2.5% -1.9%-1.8% -2.3% -3.7% -5.2% Frozen -0.5% -0.2% 0.0% -1.5% -1.2% -2.2% -3.8% General Food 3.1% 4.3% 4.3% 0.9% 3.4% 3.2% 0.2% 3.9% 2.1% 1.6% -0.5% 1.3% 1.3% 0.4% 0.2% -0.8% -1.3% Liquor -3.9% Refrigerated Source: IRI Market Advantage, 4 weeks ended 3/19/2017, 2/19/2017, 1/22/2017 and same periods prior two years; Food only. Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 20

21 Perimeter giants produce and meat posted low dollar sales growth in Q1, placing downward pressure on the whole sector. Perimeter Sales by Department % of Dollar Sales Produce 45% Seafood 4% Deli Cheese 2% Deli Meat 5% Prepared Deli 8% Perimeter Sales Q1 Performance versus YA, by Department Dollar Sales Change vs YA Pounds Change vs YA Deli Cheese 2.9% 2.6% Deli Meat 2.5% 4.6% Prepared Deli 4.0% 3.3% Meat 0.4% 3.0% Produce 1.8% 3.9% Seafood 0.5% (6.3%) Total Perimeter 1.4% 3.5% Meat 37% Source: IRI FreshLook, Q and same period prior year; MULO and Grocery; excludes in-store bakery Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 21

22 Southeast and South Central regions were insulated from early 2017 edibles declines; all regions except California show positive growth in the most recent period. Region Trends for Total Edible West 13wk $ Sales ($MM) $14,053 4wk % Chg YA 1.4% 13wk % Chg YA 1.5% Plains 13wk $ Sales ($MM) $9,064 4wk % Chg YA 0.3% Great Lakes 13wk $ Sales ($MM) $18,166 4wk % Chg YA 0.4% 13wk % Chg YA -0.2% Northeast 13wk $ Sales ($MM) $19,814 4wk % Chg YA 0.7% 13wk % Chg YA -0.2% 13wk % Chg YA -0.4% Mid South 13wk $ Sales ($MM) California $12,271 13wk $ Sales ($MM) $16,987 4wk % Chg YA 1.5% 4wk % Chg YA -0.7% 13wk % Chg YA -0.2% 13wk % Chg YA -0.8% South Central 13wk $ Sales ($MM) $15,849 4wk % Chg YA 1.2% 13wk % Chg YA 0.9% Southeast 13wk $ Sales ($MM) $20,080 4wk % Chg YA 1.0% Source: IRI ILD POS database; L13 & L4WE 3/19/17, MULO+C Regions 13wk % Chg YA 0.9% Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 22

23 Edibles declines are mirrored across income segments. 3.0% 2.0% Edible Dollar Sales % Chg. vs. YA, by Household Income Total US <$30K $30K-$59K $60K-$99K $100K> 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Oct-162 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Source: IRI Consumer Network, CSIA Total US All Outlets; Quad Week Data Ending and preceding; NBD Aligned to Multi-Outlet Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 23

24 Hispanic shoppers lagged early, but have experienced more-rapidthan-average improvement. 3.0% 2.0% 1.0% Edible Dollar Sales % Chg. vs. YA, by Ethnicity Total US White Hispanic 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Oct-162 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Source: IRI Consumer Network, CSIA Total US All Outlets; Quad Week Data Ending and preceding; NBD Aligned to Multi-Outlet Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 24

25 Q1 edibles sales dipped across generations, but seniors have struggled more than others during the past year. 6.0% 4.0% 2.0% Edible Dollar Sales % Chg. vs. YA, by Generation Total US Millennials Gen X Younger Boomers Older Boomers Retirees Seniors 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Oct-162 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Source: IRI Consumer Network, CSIA Total US All Outlets; Quad Week Data Ending and preceding; NBD Aligned to Multi-Outlet Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 25

26 Edible sales declines are driven by a combination of a decrease in trips and per-trip spending, but spending dips were more noteworthy. Edible Trips and Spending % Chg. vs. YA, Total US 5.0% 4.0% Retailer Trips Retailer Dollars per Shopper 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% 16-May 16-Jun 16-Jul 16-Aug 16-Sep 16-Oct Oct Nov 16-Dec 17-Jan 17-Feb 17-Mar Source: IRI Consumer Network, CSIA Total US All Outlets; Quad Week Data Ending and preceding; NBD Aligned to Multi-Outlet Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 26

27 Spending declines occurred across key consumer segments; seniors and millennials cut back more sharply than average and their cuts were more prolonged. Edible Spending % Chg. vs. YA, Key Consumer Segments 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% Total US Seniors Millennials Hispanics 16-May 16-Jun 16-Jul 16-Aug 16-Sep 16-Oct Oct Nov 16-Dec 17-Jan 17-Feb 17-Mar Source: IRI Consumer Network, CSIA Total US All Outlets; Quad Week Data Ending and preceding; NBD Aligned to Multi-Outlet Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 27

28 Private brand spending was less impacted by industry softness than national brands. Edible Spending Dollars per Trip $23.00 National Brands $22.50 $22.00 $21.50 $ May 16-Jun 16-Jul 16-Aug 16-Sep 16-Oct Oct Nov 16-Dec 17-Jan 17-Feb 17-Mar $12.00 Private Brands $11.50 $11.00 $10.50 $ May 16-Jun 16-Jul 16-Aug 16-Sep 16-Oct Oct Nov 16-Dec 17-Jan 17-Feb 17-Mar Source: IRI Consumer Network, CSIA Total US All Outlets; Quad Week Data Ending and preceding; NBD Aligned to Multi-Outlet Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 28

29 Private brand trips were also less volatile than national brands. Edible Trips Trips per Buyer National Brands 16-May 16-Jun 16-Jul 16-Aug 16-Sep 16-Oct Oct Nov 16-Dec 17-Jan 17-Feb 17-Mar 5.5 Private Brands May 16-Jun 16-Jul 16-Aug 16-Sep 16-Oct Oct Nov 16-Dec 17-Jan 17-Feb 17-Mar Source: IRI Consumer Network, CSIA Total US All Outlets; Quad Week Data Ending and preceding; NBD Aligned to Multi-Outlet Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 29

30 Q1 economic growth has been volatile in recent years, but hit a threeyear low this year. Annual rate of 0.7 percent Negatively impacted by weak home heating and auto sales Source: National Public Radio; Moody s Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 30

31 Still, economic expectations for 2017 are reasonable. Economic Measure P GDP (% chg) 3.3% 4.2% 3.7% 3.0% 4.3% Unemployment (%, SA) 7.4% 6.2% 5.3% 4.9% 4.6% Consumer Price Inflation (% Chg) 1.5% 1.6% 0.1% 1.3% 2.7% Retail Sales (% Chg) 3.8% 4.1% 2.3% 3.0% 5.5% Residential Permits, Total (Mil) Source: Moody s Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 31

32 CPGs can encourage shoppers to trade up to premium-tier solutions with carefully targeted messaging that highlights smart splurges. Expect to Purchase More Premium Brands During the Next Six Months, by Income Expect to Purchase More Premium Brands During the Next Six Months, by Generation >$100K 40% Seniors 31% $55K-$99K 27% Boomers 30% $35K-$54K 29% Gen X 26% <$35K 21% Millennials 24% Total Population 28% Total Population 28% Source: Consumer Connect, Q & Q Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 32

33 CPG marketers will build margin and share with messaging that underscores the value of in-demand bells and whistles. Consumer Willingness to Pay a Premium for Total Population Options that offer benefits beyond basic nutrition Natural/organic solutions Environmentally friendly packaging 41% 38% 29% 30% 22% 22% Order online for home delivery NA 19% Order online for instore pick up NA 10% Q Q Source: Consumer Connect, Q & Q Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 33

34 Targeting against high-potential consumers is critical. For instance, millennials will pay more for online ordering with home delivery and wealthier shoppers will pay more for nutrition density and eco-friendliness. Consumer Willingness to Pay a Premium for by Income Consumer Willingness to Pay a Premium for by Generation Options that offer benefits beyond basic nutrition Natural/organic solutions Environmentally friendly packaging Order online for home delivery Order online for in-store pick up 46% 43% 37% 34% 38% 40% 35% 28% 23% 30% 30% 25% 21% 18% 22% 29% 21% 19% 13% 19% 15% 10% 9% 8% 10% $100K> $55-$99K $35-$54K <$35K Total Population Options that offer benefits beyond basic nutrition Natural/organic solutions Environmentally friendly packaging Order online for home delivery Order online for in-store pick up 31% 36% 43% 48% 38% 18% 26% 39% 42% 30% 20% 22% 19% 28% 22% 10% 16% 26% 27% 19% 4% 10% 14% 12% 10% Seniors Boomers Gen X Millennials Total Population Source: Consumer Connect, Q Copyright 2017 Information Resources, Inc. (IRI). Confidential and Proprietary. 34

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