August 24, 2023

Retailers look to get suppliers’ prices lower


Retailers to exert more pressure on CPG companies and other suppliersWalmart shares (black) have outperformed Target (blue) since news of a needed inventory correction in mid-2022 sent both lower. (Chart: Inc.)

We had a lot to say last week about Walmart and Target earnings reports, but it’s also worth highlighting the read-throughs for CPG companies that sell into those retailers. Many CPGs disclosed that Walmart is their largest customer, representing about 20% of total sales. Here are three takeaways important for CPGs:

  1. Consumer spending held up better than Walmart had expected at the beginning of the quarter. The retailer is seeing this in its general merchandise category, which while still under pressure is posting moderating sales declines. The implication is that, with household incomes finally outpacing inflation rates, consumers have a little bit more income for the rest of the store after buying essentials. That suggests that CPG elasticities will remain low.
  2. Walmart is focused on getting prices down to fight inflation. Walmart earns a higher margin on more discretionary general merchandise than it does on grocery items and other consumables. Many Walmart customers live paycheck to paycheck so consumable inflation comes right out of general merchandise sales. Management said that passing through lower commodity costs via promotions is “the easy way out” and it would prefer to work with CPGs on lowering on-shelf costs to reflect recent reductions in freight costs and other inputs. Expect Walmart to be more aggressive on price with suppliers.
  3. In-stock rates rise in importance. In-stock rates are of particular importance for Target as the retailer addresses a demographic that overlaps heavily with Amazon’s Prime clientele and is used to the convenience of e-commerce. Target mentioned “in stock every time” a half-dozen times on its analyst call and called it one of its three top priorities. Expect retailers to be even more demanding with their on-time and in-full expectations.

Consistent with recent performance, FreightWaves data shows a bigger drop in Target truck visits (blue) than Walmart truck visits (green). (Chart: SONAR)

Food tech companies continue to struggle

Shares of meat alternatives company Beyond Meat (black line) and dairy alternatives company Oatly (blue line) have trended down, roughly together in the past two years. (Chart: Inc.)

In contrast to most publicly traded consumer packaged goods companies that have reported strong results in recent quarters, there has been a surge in bankruptcies among smaller food companies, which analysts expect to continue. Recent food bankruptcies include Tattooed Chef (vegetarian foods), Do Good Foods (food made from ingredients that would otherwise be wasted) and Bang Energy (energy drink maker, which has since been acquired by Monster Beverage). In addition, there have been numerous bankruptcies in the vertical farming space, including AeroFarms and AppHarvest.

What most of those companies have in common is that they have attempted to approach the industry from a unique angle, such as by using unconventional ingredients or growing methods. These segments are worth keeping an eye on because they represent potential disruption to traditional food supply chains. Venture-backed food tech companies have struggled to maintain financing as capital firms transition from demanding growth at all costs to demanding profitability — which has been hard to come by in vertical farming, in particular. The impact on pressured food categories can also be seen in certain publicly traded companies, such as Beyond Meat — which had a one-time market cap of more than $13 billion that is now less than $1 billion.

Small fleets must step up service levels to mitigate scale disadvantage(Photo: FWTV)

On Monday’s The Stockout show, I interviewed Guillermo Garcia, co-founder and CEO of SmartHop, a fleet management solutions company that supports very small trucking fleets. Small fleets have been under a disproportionate amount of pressure in the past year and a half due to the transactional nature of their business as spot volume dried up and as spot rates remain depressed. In that tough market, Garcia has seen an uptick in bankruptcies among small fleets. 

Carriers that rely on the spot market, which includes many small fleets, have been disproportionately hurt by the weak freight market the past year and a half. Contract linehaul rates and spot rates, with fuel removed, are shown in white and orange, respectively. (Chart: SONAR)

To help mitigate the scale advantages that large carriers enjoy, which include a greater ability to participate in the contract market as well as better purchasing, small carriers must focus on delivering excellent service when given the opportunity. That not only includes on-time pickups and deliveries and notifying shippers of any unexpected delays but also not breaking commitments once the carrier has agreed to haul a load. Canceling on a shipper or broker to take a more lucrative load is typically not in a carrier’s best interest in the long term because maintaining relationships and a reputation for reliable service are key.

See the full interview here

Redwood’s Leppert sees demand uptick as return to ‘traditional’ seasonality(Photo: FWTV)

On last week’s The Stockout show, I interviewed Jeff Leppert, SVP of capacity solutions at Redwood Logistics. Redwood looks to optimize its clients’ supply chain efficiency, which often involves using modally diverse capacity solutions. Leppert considers the uptick in freight demand in July and August to reflect at least a partial return to seasonal patterns that are more traditional as inventories are now closer to being rightsized and with back-to-school and preholiday freight season upon us. Leppert expects now-defunct Yellow’s market share to be easily absorbed by the remaining less-than-truckload players and believes that maintaining carrier relationships will be key for shippers to secure capacity for when the market eventually turns back in carriers’ favor — something we hear often and is easier said than done. See the full interview here.

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The second annual F3: Future of Freight Festival will be held in Chattanooga, “The Scenic City,” this November. F3 combines innovation and entertainment — featuring live demos, industry experts discussing freight market trends for 2024, afternoon networking events, and Grammy Award-winning musicians performing in the evenings amidst the cool Appalachian fall weather.

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