With inflation still elevated in center-store grocery categories, Walmart may use its market power to press consumer packaged goods manufacturers to rein in pricing, according to CFRA Research analyst Arun Sundaram.
In a research note by Sundaram titled “Walmart Isn’t Happy with Packaged Food Companies.” perishables categories, namely fresh meat and produce, have “meaningfully” trended downward in inflation over recent months, whereas prices of packaged foods and household products have remained “stubbornly high” and “Walmart is sick of it."
“Walmart has recently voiced its concern over persistent inflation in dry grocery and consumable categories, which we believe is a warning shot for CPG companies looking to further raise prices,” he said.
“It’s clear Walmart isn’t happy with persistently high levels of packaged food inflation and will look to bring these costs down throughout 2023,” Sundaram stated. The retail giant is taking aim at “persistently high levels of packaged food inflation."
“Given Walmart’s enormous bargaining power over its suppliers, we expect the retail giant to push back on further price increases from its packaged food suppliers. Walmart is the top customer for most packaged food companies, so maintaining a strong relationship with Walmart must be a high priority for those companies."
“Most large, packaged food companies under our coverage have 10% to 20% of their annual sales with Walmart, with some having more than 20% exposure. As a result, Walmart has much more bargaining power over its suppliers than its suppliers have with Walmart,” he noted. “If price negotiations turn ugly, Walmart can always allocate more shelf space to another supplier.”
In its fiscal 2024 first quarter, Walmart saw food costs rise by low double digits year over year, while on a two-year stack, food cost inflation for the retail giant topped 20%, Sundaram noted. Meanwhile, most CPG manufacturers have “hovered around” 15% year-over-year price/mix growth since implementing and accelerating price hikes beginning in the summer of 2021, he said.