Topics Covered: February 27, 2023

  1. CPG digital themes from CAGNY
  2. Walmart 4Q analysis
  3. Target invests $100mm in sort centers
  4. Home Depot predicts flat consumer demand in ‘23
  5. A new retail media option for CPG
  6. FTC won’t challenge Amazon’s x One Medical

Digital Takes Center Stage at CAGNY 2023

The annual CAGNY conference took place last week in Florida providing participating leadership teams across the largest CPG companies the opportunity to talk about their corporate strategy, changes underway in their organizations, and long-term growth and profitability goals.

 

We reviewed the presentations and commentary to uncover common themes across organizations.

 

Read on for our key insights from the conference.

TL;DR

  1. A volatile ’20-’22 has given way to a focus on long term targets, innovation and growth
  2. eCommerce is growing, healthy, and for some, share is higher online than in-store
  3. Media spending plans are very healthy with retail media consistently called out
  4. Companies are building first-party data, but the business impact is less clear
  5. Unique assets might be monetizable (in the distant future)

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For the Nerds

Walmart's positive business mix changes from digital: Walmart emphasized once again its strength in the grocery category along with a focus on digital initiatives during its 4Q results. The company’s guidance for FY24 was more muted, with sales projected to grow just 2-2.5% in the U.S. (vs. 6.9% in FY23). Management indicated it was taking a conservative approach to guidance considering the difficulty predicting consumer demand, along with uncertainty in forecasting inflation.

 

Walmart’s management team expressed conviction on their ability to drive operating income ahead of sales growth due in large part to the technology and eCommerce investments it has made in recent years.

 

These investments are helping shift the business mix to such a degree that Walmart can offset margin pressure it’s seeing from negative assortment mix (i.e., grocery gaining share of total sales from general merchandise).

 

It pointed to strong profitability in its advertising business, Walmart Fulfillment Services (WFS), and Data Ventures as three areas that are expected to help improve margins to a degree this year, and then much more so a year from now. (Stratably)

Target expands sort centers: Target plans to invest $100mm over four years to add six more sort centers, bringing the total to 15. These facilities help keep store operations efficient, while improving last mile delivery speed and cost.

 

Pre-pandemic, few would have believed eCommerce would offer compelling positive ROI opportunities to the CFOs of Walmart or Target that have an endless array of options to deploy capital.

 

Yet, like Walmart, Target is identifying and investing in positive eCommerce-related projects, estimating eCommerce will continue to grow as a percentage of its total sales. (Target)

Home Depot estimates flat consumer spend in '23: Home Depot reported its 4Q results, with U.S. comps down 0.3%, turning negative after several years of pandemic fueled home improvement demand. Both November and  January saw negative comps while December was positive.

 

The company guided full year sales for '23 flat, in-line with what it expects for consumer demand overall, and better than what it thinks the broader home improvement market will perform. Operating margins are expected to come under some pressure as well.

 

Interesting commentary:

  1. Less price sensitive than historical trends
  2. Pro backlogs still healthy, but below peak last year
  3. Believes consumer shifting spend to services away from home related goods
  4. Consumer demand expected flat in '23, and down for home improvement specifically
  5. Product cost inflation decreasing but still above historical trends
  6. Reinvesting $1B into front line associate wages
  7. Nothing noticeable in terms of promotional environment changing

 

The company did not talk much about digital, but when asked how it plans to take share it reference (1) interconnecting physical and digital channels to reduce consumer friction and (2) building out its Pro offerings. (Home Depot)

Independent grocery retail media: IGA is partnering with Ideal by Design House to offer independent grocers a retail media solution at no cost. The partnership intends on attracting thousands of independent grocers onto the platform, ultimately rivaling that of a large scale national grocer.

 

The trajectory of this new retail media entrant creates all sorts of interesting questions:

  1. Team integration: How will merchants at these grocers integrate with selling ads?
  2. Fragmentation: Will this be able to attract enough attention from brands to devote incremental dollars and people resources to activate on the platform?
  3. Performance: How does a smaller scale platform perform relative to larger scale options?

 (Ideal)

FTC won't challenge Amazon acquiring One Medical: Amazon's $3.5B acquisition of One Medical will go unchallenged by the FTC. However, it will issue a "close at risk" warning letter, indicating it will be investigating any consumer harm that comes from the acquisition.

 

The "close at risk" concept essentially means the FTC doesn't have enough grounds to launch a challenge, but it acknowledges the complexity of trying to predict just how a tech giant will change the direction of the company or even the industry.

 

Tech companies buying healthcare companies is difficult to understand. The competitive reaction is difficult to predict. Antitrust laws are not well suited to evaluated modern tech companies.

 

It's a great example of the complexity of navigating a company through a constant state of technological change. (Bloomberg)