Online grocery sales plummeted over 12% in May compared to April as food prices soared by a similar amount, making this the fourth month out of the last five that they fell.
While e-commerce food purchases are still up year-over-year, "customers are increasingly focused on finding ways to pay no more than necessary when shopping online," according to the latest Brick Meets Click/Mercatus Grocery Shopping Survey.
Yet, something else was also very apparent in the survey results: Not all grocers are feeling the pain quite as severely as others. That means investors can still profit from the online shopping trend that really began in earnest during the early stages of the pandemic.
The high cost of just living
The U.S. Bureau of Labor Statistics reported the Consumer Price Index (CPI) was up 1% in May, helping inflation race 8.6% higher in the month -- the highest rate in over 40 years -- and dashing hopes that rising costs had stalled after April's numbers eased back with just a 0.3% increase.
Food is just getting more expensive. The food-at-home category experienced a 1.4% increase last month, meaning the 12-month rate was 11.9%, or the largest 12-month increase since April 1979.
It's no longer so important for consumers to get the products they want (that's actually dropped from first to last in consideration among shoppers). Instead, it's important to get a good price on a product, and get it conveniently.
Not all grocers are the same
Another issue facing grocers is that rising grocery prices mean dining out is not always the more expensive option. Inflation isn't hitting restaurants as hard since out-of-home food costs rose half as fast in May (up 0.7%), for a 7.4% annual increase.
Restaurants may also be eating some of their commodity costs to keep consumers coming back, because after the lockdowns of the pandemic, consumers just might be more inclined to dine out more than they were previously.
Investors just need to pick out who can still win -- or is winning. The clues are in the Brick Meets click survey. It turns out traditional grocery store food stocks like Kroger (NYSE: KR) and Albertsons (NYSE: ACI) are not faring so well against mass merchandisers such as Walmart (NYSE: WMT) and Target (NYSE: TGT).
Monthly active users (MAU) for supermarkets fell by more than 10% in May, while also seeing order frequency decline 5% for the month. Mass merchandisers, on the other hand, saw a 20% increase in MAUs and a 2% increase in order volume.
The survey also noted that both grocery stores and mass merchandisers did see larger order values in the month, though that likely means they were buying bigger items, but fewer of them.
The digital divide
Walmart said e-commerce sales were up 1% year-over-year, but 38% on a two-year stack, though that obviously includes more than just grocery items. Meanwhile, Target saw 3% gains in digital sales, which also includes items other than food. It noted that since the start of the pandemic the channel was responsible for driving $3.3 billion in sales compared to $4.1 billion at its stores, and it has increased over 250% in that time.
Kroger, on the other hand, saw a 6% decline in digital sales, even though it beat Wall Street's top- and bottom-line estimates and raised guidance for the full year. Albertsons is due to report results soon, and though it saw strong results in the prior quarter, especially on a two-year basis, there's a good chance that has weakened considerably this time around, and may get worse -- economists are saying inflation may continue rising to 9% or more.
Even Amazon.com (NASDAQ: AMZN) is having difficulty in the food category, with data from Coresight Research showing 56.9% of Prime members ordered groceries so far in 2022, down from 57.7% last year and over 70% in 2018.
Having a discerning eye
Walmart's stock tumbled sharply after it released its earnings report, and it trades at a reasonable 17 times next year's estimates and just a fraction of its sales. Wall Street, though, still expects the retailer to grow earnings at a compound annual rate of 9.5% for the next five years. Target is even more attractive at 11 times estimates and a 20% compound annual earnings growth rate.
Although Kroger and Albertsons also trade at seemingly attractive valuations currently, their projected earnings growth is significantly lower than their mass merchandise counterparts.
Yet as pure-play grocery stores operate at thin margins, an inflationary period such as we're in right now may make their stocks less attractive than either Walmart's or Target's. And though Amazon trades at comparatively higher valuations, it should still be considered because it is much more than just a grocery play.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Target. The Motley Fool has a disclosure policy.
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