A Stock Pick as Shoppers Deal With Egg Prices

Key Takeaways:

• Inflation is impacting the way people grocery shop. 
• To save money, shoppers are flocking to private-label brands. 
• It doesn’t appear that a cooldown in prices will change this behavior. 

Sales of private-label, or generic, brands at grocery stores have surged over the last year. Like toilet paper not from Procter & Gamble (PG), but from low-key entity Sprouts Farmers Market (SFM). 

Speaking of Sprouts, here’s what the company’s CEO, Jack Sinclair, said about private-label sales on last week’s earnings conference call:

Sprouts brand hit $1 billion in sales late last year. A remarkable accomplishment, largely due to our focus on innovation. We plan to accelerate this growth even more in 2023. 

You will see additional new Sprouts brand products, an increased focus on seasonal programs, and a brand style and packaging redesign that is already showing promising results.

Sprouts isn’t alone in expanding its private label. It’s happening at other pure-play grocery store chains, such as Kroger (KR), and big-box retailers that sell groceries, like Target (TGT). 

Speaking of Target, here’s what it said about private labels on its earnings call last week (emphasis added):

Recently, a study listing the 10 fastest-growing private label brands in 2022 included three found exclusively at Target. Target was the only retailer to have more than one brand on the list, and two of them were the only nonfood brands to make the cut.

[…]

For us, we talk about owned brands rather than private label because these are brands we’ve invested in for years. We build them, design them, create the packaging, the marketing materials, and they’re hugely important to our strategy. And so, in that sense, we never think about it as trade-down, we think about it as trade-in. It creates more options for people to use and engage with our portfolio because it tends to be the same great quality at incredible price points. 

From an investment perspective, that’s worth considering. 

So much of our bull case for, say, Starbucks (SBUX) revolves around creating customer loyalty. How do you get people to not only come back repeatedly, but to identify with and even get excited about your brand? 

While Target can’t rely on people Instagramming colorful drinks the way Starbucks can, it can be somewhere one shopper friend says to another, “I got the Target-brand aspirin, and it was this much cheaper and just as good as Bayer.”

That’s no small thing. If Target has a head start in capturing consumers via the private-label trend – which it does based on the rankings it cited on its call – this sweetens the company’s long-term investment case. 

The Bottom Line: Overall, sales of private-label products hit $228.6 billion in 2022, up roughly 11.3% from 2021. 

In specific categories, sales of private-label bottled water rose 22.8% in 2022 to $6.7 billion. The broad beverage category popped 19.1% year over year, with liquor (+15.6%) and floral (+13.5%) posting impressive gains. 

But eggs take the cake, a sure sign inflation is driving much, if not most of, this trend. Private-label egg sales soared 49.6% in 2022, ending the year at $5.7 billion. We’re not yolking!

Consumers have switched as inflation runs wild. They’re saving some money. And they’re happy with private labels: 73% of people in a recent survey said they’ll buy private-label brands even as the economy rebounds.

They’ll save some or all of that price difference or, as part of the potential bull case, spend it in other aisles at Target.

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