Consumers are putting fewer items in their carts
(Chart: Barchart.com Inc.)
In the face of inflationary pressure the past two years, consumers have generally not cut back much on everyday purchases, and CPG companies have often said that elasticities have been muted, or at least no worse than history would suggest. But recent CPG results suggest that may be starting to change in a more meaningful way that goes beyond consumers occasionally trading down from a national brand to a competitive private-label alternative.
On its analyst call last week, Conagra’s management said that consumers have been buying fewer items overall, rather than trading down to less expensive alternatives. The packaged food giant also said that buying behavior demonstrates shifts in consumption that go beyond the initial impacts of elasticity from higher prices considering that many of the currently elevated prices have been in place for a year or longer. Conagra’s management also said it saw that dynamic play out more heavily just after Easter and that it has been broad-based across many product categories and competitors.
Summer travel, consumers drawing down pantry/freezer stockpiles and a narrowing spread between processed foods and fresh foods may all be playing a role in consumers putting fewer CPG items in their carts. But after two years of inflation outpacing wage growth (June’s data showing wage growth narrowly exceeding CPI is an exception), it’s hard to argue that there isn’t a large portion of the U.S. population under financial strain that is keeping a lid on both bigger-ticket discretionary items and even volume of consumer staples that are typically recession resistant.
For additional detail, see Adam Josephson’s recent article here.
Domestic intermodal volumes have shown little seasonal volume improvement since Q1
(SONAR: ORAILDOML.USA seasonality)
The lack of seasonal volume improvement in the second quarter was one of the themes of J.B. Hunt’s earnings on Tuesday. That is also reflected in the above SONAR chart that shows loaded domestic containerized intermodal volume (i.e., loaded 53-foot containers), the market for the multimodal carrier’s largest segment, which only increased 1.2% from Q1 to Q2 (and was down 5.3% year over year).
Other takeaways from J.B. Hunt’s earnings include:
While inventory destocking has moderated, demand is still being tempered by some continued inventory destocking as well as lower import activity. (I recommend FreightWaves’ Henry Byers’ latest article on that topic, The “peak” of peak season is here.)
The intermodal discount versus truckload is in line with historical averages, according to J.B. Hunt.
Intermodal pricing renewals are negative with most intermodal contracts already repriced lower in the currently loose freight market.
Watching intermodal volume (such as in the SONAR chart above) is critical as the multimodal carrier expects volume to improve before intermodal pricing increases.
J.B. Hunt expects a portion of the import volume that was diverted to the East Coast ports to remain even with the alleviation of shippers’ ILWU labor concerns.
For additional detail, see Todd Maiden’s article here.
Short line rail association encouraged by Class I service improvements
Joanna Marsh, FreightWaves’ railroad journalist, and I interviewed Chuck Baker, president of the American Short Line and Regional Railroad Association (ASLRRA), last week. The full interview, part of FreightWaves’ People Speaking Rail series, can be seen here. People Speaking Rail is live on FreightWaves.com each Thursday at 3 p.m. EDT.
Short line railroads, which focus on providing strong customer service in the first/final miles, view railroad service from a similar lens as shippers — they need it to be on time as consistently as possible. Baker is encouraged by improvements in railroad service levels in recent months, particularly from eastern U.S. Class I railroad CSX. The current group of Class I railroad CEOs primarily come from a shipper or marketing background and/or are focused on volume growth and service levels in addition to margins. That is a departure from recent years when the Class I railroads seemingly prioritized a lower operating ratio over all other concerns.
In addition to “playing offense” (i.e., helping the short line industry secure grants and tax credits for infrastructure development and maintenance), the ASLRRA has its hands full “playing defense,” or educating lawmakers of the negative impacts from potential government overreach. In particular, short line railroads would like to stave off any legislation that would require two workers in a locomotive at all time — unlike Class Is, short lines often have only one worker in the cab at a time and have operated safely in that manner for many years. The ASLRRA also finds proposals from the California Air Resources Board (CARB) that would mandate electric locomotives to be wildly unreasonable — that is particularly true for short line railroads. Short lines typically buy locomotives that are several decades old for about $100,000 versus new electric locomotives that might cost upward of $5 million to $6 million.
ODW touts supply chain simplification
On last week’s The Stockout show, I interviewed Phil Schmidbauer, senior director of analytics and solutions at ODW Logistics, a 3PL that has a speciality in food and beverage logistics. In addition to Schmidbauer not seeing evidence of a turnaround in the freight market, other themes of the discussion included the importance of shippers maintaining carrier relationships and the benefits of supply chain simplification, which ultimately lead to less cost and fewer disruptions.
Shippers often talk about “supply chain resilience” but some disruptive factors like a lack of front-line workers can be difficult or impossible to hedge against. Instead of building more redundancy into supply chains in an attempt to make them more bulletproof, Schmidbauer recommends streamlining supply chains so there are fewer issues to begin with. Supply chains become easier to manage when there are fewer SKUs (SKU reduction is a major trend currently in CPG), when one centralized warehouse is used rather than multiple warehouses and when shippers utilize one logistics company that can oversee the entirety of a shipper’s supply chain from end to end.
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