For those who’ve stepped foot inside an American supermarket up to now few years, there’s an excellent probability you’ve got experienced sticker shock. But shareholders of the country’s largest grocery chains are singing a unique tune.
Food prices — together with energy prices — are historically volatile and due to this fact stripped out of the U.S. Bureau of Labor Statistics’ core Consumer Price Index (CPI) reading every month. So when July’s core CPI print of three.2% got here out in August, that figure didn’t tell us much about what’s been happening with grocery prices specifically.
The BLS tracks food prices individually, and in line with its data, the pace of food inflation has actually slowed. Drilling down into the assorted food categories, nevertheless, tells one other story — one which’s helping the stocks of publicly traded firms on this space appreciate significantly.
Food inflation is sticky
Despite dairy products, fruit and vegetables having seen year-over-year disinflation of 0.2%, other subsets proceed to place pressure on Americans’ household budgets. Nonalcoholic beverages, for instance, rose 1.9% over the identical period; meats, poultry, fish and eggs saw price increases of three.0%.
While a few of those figures are lower than the broad CPI reading of two.9% in July — which does include food and energy prices — zooming out paints a unique picture. Federal Reserve Economic Data maintains an index of the U.S. city average for food at home. The index, which remained mostly flat from 2010 to 2019, has increased a whopping 26.43% for the reason that start of 2020.
And as analysts and supermarket executives argue that supply-chain disruptions and increased labor costs are the first driver of food inflation, they often fail to deal with allegations of how corporate greed has contributed to all-time high revenues that unjustifiably exceed profit margins. In April, Robert Reich, the previous secretary of labor under President Bill Clinton, posted on his website that “we’re seeing this pattern across much of the economy — especially with groceries.”
Reich, who studied antitrust law at Yale University, added that despite inflation having subsided, “consumer prices are still up, allowing most corporations to maintain their profit margins near a 10-year high.”
Prices surpassing inflation
In a March report, the Federal Trade Commission found that food retailers’ profit margins exceeded the prices they passed along to consumers each during and after the pandemic at rates that might not be rationalized by supply-chain disruptions or wage increases.
Grocery chain profits spiked 11% between 2021 and 2022; they’ve yet to come back down. Specifically, the FTC noted that “data indicates that one measure of annual profits for food and beverage retailers — the sum of money firms make over and above their total costs — rose substantially throughout the pandemic and remain quite elevated,” adding that “this profit trend casts doubt on assertions that rising prices on the food market are simply moving in lockstep with retailers’ own rising costs.”
Costco, for instance, saw its profit margins increase from 12.2% in 2022 to 12.3% in 2023, with a trailing 12-month reading of 12.5% into 2024, in line with Morningstar data. Since 2019, the corporate’s revenue has grown by greater than 66% while its net income (aka profit) increased nearly 96%.
And despite some firms continuing to point the finger at supply chains and labor costs, one store was recently forced to confess that it was price-gouging its customers. During Kroger’s antitrust trial in August, its senior director for pricing, Andy Groff, acknowledged that the grocery giant had raised its prices for certain food staples — like eggs and milk — after the FTC presented evidence of an internal email written by Groff stating “retail inflation has been significantly higher than cost inflation” for those items.
Kroger’s antitrust lawsuit is the results of its attempted acquisition of Albertsons, one other food retail giant. If the $24.6 billion acquisition is ultimately permitted, Kroger would operate 5,000 stores and 4,000 pharmacies with 700,000 employees across 48 states.
The final result can be a $50.08 billion market cap company that, in line with the FTC, would exacerbate anticompetitive practices. The FTC says executives from the 2 firms have admitted that they’d now not need to “aggressively compete for purchasers by lowering prices and for workers by providing higher pay and advantages across the country” and have conceded that the planned acquisition is anticompetitive, with one executive allegedly having stated that “you’re principally making a monopoly in grocery with the merger.”
Grocery chain stocks proceed to surge
Between the run-up in prices for food staples and record-high revenues for retailers, it’s no surprise that the stocks of firms operating in that sector aren’t only performing well but in some cases outperforming the market. Over the past five years, the S&P 500 has gained nearly 86% largely on the back of the Magnificent Seven, a gaggle of tech firms whose massive market caps have an outsized impact on the benchmark index.
For comparison, shares of Ingles, a supermarket chain within the Southeast, have gained greater than 84% over the past five years. Walmart — America’s largest grocer — has seen its stock rise 102% since 2019. In the course of the same period, Kroger’s stock has gained greater than 117% and shares of Costco are up over 190%.
The winner, by far, is Arizona-based Sprouts, which has seen its stock increase by an astounding 445% over the identical timeframe.
In response to Grand View Research, the grocery retail market within the U.S. is anticipated to expand at a compound annual growth rate (CAGR) of three.2% from 2024 to 2030. Nonetheless, with food firms now openly admitting to anticompetitive practices and price-gouging, each of which can proceed to fortify record profits, their stocks could proceed to markedly outperform the general grocery retail industry’s CAGR.
More from Money:
This Latest Investing Trend Can Double the Returns of Single Stocks — but It’s Dangerous
Here’s Tips on how to Rebalance Your Investments Ahead of (and During) Retirement