Scenario Planning Amid Uncertainty

Food Retailers ( Kroger , 沃尔玛 , ALDI USA , Whole Foods Market , Costco Wholesale ) are facing significant disruptive forces in the coming month and for the next few years.

As a resident of the Queen City ( Cincinnati USA Regional Chamber ) and home to Kroger , many have been waiting for a decision in the Kroger and Albertsons merger. According to a long-time acquaintance Steve Watkins at Cincinnati Business Courier , the previous ruling date of November 15th was pushed back to December 10th, according to this article (subscription required). More specifically,

Judge Marshall Ferguson has moved the date for him to issue a ruling in King County Superior Court in Seattle to Dec. 10. Ferguson has set a court time for 1:30 p.m. Pacific (4:30 p.m. Eastern) to hand out the ruling on the Washington attorney general’s lawsuit against Kroger and Albertsons seeking to halt Kroger’s ability to buy Albertsons stores in that state.

While waiting for a ruling ... Wal Mart continues to gain Market Share

I loved this analysis by Peter Gialantzis on 沃尔玛 's recent earnings for which they reported 5.3% YoY comp growth and their accelerated growth in online shopping. While at The Directions Group , I did an update on food retail business and what became abundantly clear differentiating factor has been the footprint of 沃尔玛 stores. At a time when commercial real estate has been relatively soft (as more retail pulled forward from brick-and-mortar due to COVID to online), the 3,600 Supercenters that average 182,000 square feet have not been a yoke for the retailer. Rather, has been reimagined and transformed into market fulfillment centers while maintaining the customer's in-store experience. While the company has always touted their ability to reach 90% of the US population with their stores, the size of their massive stores have given them the ability to meet online customer needs in an efficient logistical last mile delivery to the customer. More information can be found in this article.

Another Disruptive Force for all Retailers ... Tariffs

Just when you thought inflation was behind us, consumers and retailers are staring down a double-barrel shotgun of potential tariffs. President-elect Donald Trump's campaign centered around posing tariffs. Per this article from CNBC ,

Walmart’s and Lowe’s comments are from U.S. retail leaders about the potential blowback from from the duties. During Trump’s presidential campaign, he said he would impose a 10% to 20% tariff on all imports, including levies as high as 60% to 100% for goods from China.

On an earnings call, Lowe’s CFO Brandon Sink said about 40% of the company’s cost of goods sold comes from outside of the U.S., including direct imports and merchandise from national brands. He said tariffs “certainly would add product costs,” but added “timing and details remain uncertain at this point.”

Tariffs and the Trickle-Down Economics

Tariffs will add another element to retailers when it seems we have finally put all the supply chain and subsequent escalating consumer prices behind us. What do I mean by this?

Below is a chart (although crude one) of the Global Supply Chain Pressure Index (GSCPI) and Consumer Price Index (CPI). The trendlines demonstrate a compelling story of how US consumers have been impacted by higher prices for all purchased goods that was preceded by the rising by multiple months of increased supply chain pressure.

From the second half of 2020 through 2022, supply chain pressure index was increasing with CPI following suit in lagging fashion. While the GSCPI sharply decreased, CPI has taken a slower path lower over the last few months, but has seemed to finally stabilized.

What Does This Mean Today?

Going back to another article by Peter Gialantzis , he illustrates the EBITDA of a major CPG relative to food wholesaler (UNFI) and a food retailer ( Kroger ).

There is a symbiotic relationship in the entirety of the food supply chain - from farm gate to plate. As such, tariffs will have an impact with the supply chain and will again wreak havoc on US consumers in terms of potential inflation.

From more of an academic perspective, the International Monetary Fund had a paper in 2022 called The Effect of Tariffs in Global Value Chains. Their findings:

We find that tariffs higher up and further down in the value chain depress value added, employment, labor productivity and total factor productivity to varying degrees. We find no benefits for the sector that enjoys additional protection, yet there is some evidence of economic activity being diverted, i.e. positive effects on value added and employment from tariffs imposed on competitors.

Call To Action - Scenario Planning

My entire writeup this morning was based on one comment from Lowe's CEO Marvin Ellison that struck me on the importance of scenario planning. Per the aforementioned CNBC article,

In an interview with CNBC, CEO Marvin Ellison said like other consumer-facing brands and retailers, Lowe’s is concerned about the risk of higher costs. He said it’s already having conversations with suppliers about the “what ifs of tariffs,” as it waits to see what Trump’s policy change will ultimately look like.

“We’re not waiting to act,” he said. “We’ve got plans in place. We’ve got scenarios in place, and we’re trying to understand the implications.”

How is your business planning on the various scenarios that could be forthcoming in the coming months? This could be in the form of tariffs or other scenarios that may be coming from a new administration that controls the executive branch, senate and house of representatives. It will not be smooth sailing for the new administration per this article, but there are enough wildcards that are likely to be played from campaign promises that businesses need to be on the ready.

Joseph W. Sunderman is an Intelligence Analyst/Strategist that is a student of understanding the Current State of the US Health and its impact for the next decade. I developed the thesis over several months for Directions Research Group.? Upon completion of boiling the ocean on the topic and created an impeccable deliverable, which can be found in my project section of my LinkedIn page.

In the past, Joe spent seven years at medical device giant Ethicon (division of Johnson & Johnson) with the most recent role as US Regional Manager of Strategic Insights and Pricing.? In his seven years at JNJ, he received recognition for his servant leadership, where he was a stand out in performance by being a top 10% recipient of Encore and Inspire Awards over multiple years.? Dozens and dozens of accolades from contributors to senior leaders for his collaborative work.? Prior to Ethicon, Joe has had a wide variety of experiences in medical claims, banking, publishing, and retail.? He began his career at Schaeffer's Investment Research as a financial analyst, where he was ranked by Bridge Information Systems as one of the top 10 market analysts for three straight years for his commentary and stock picks found in Schaeffer's Daily Bulletin. Joe has been published in the Market Pulse Journal and Chartpoint and his market comments have been printed in the USA Today, Wall Street Journal, Barron's, Investor's Business Daily, Dow Jones News Wire, and Reuters. Also, Joe has made appearances on Bloomberg television.