The coronavirus pandemic has diminished food supply chains around the world. PJ Solomon Head of Grocery Investment Banking Scott Moses joins Yahoo Finance’s On The Move panel to weigh in on the state of grocers and supply chains.
- Tyson is going to shut down the largest pork producing plant in the United States because of COVID-19-- raises questions about not only the meat supply but the grocery supply channel in general. So to help us understand what's happening at the grocery store level, we want to bring back to the program Scott Moses. He's head of grocery investment banking at PJ Solomon. It's good to have you here and also want to point out that you recently advised on Save-A-Lot's $1 billion recapitalization as well as the sale of Lucky's Market and Fairway Market. For those of you who don't know, Fairway here in New York City is somewhat of a legend. A lot of us go there. So Scott good to have you here. What's the status of keeping grocery stores supplied, do you think, whether it's Fairway or anyone else?
SCOTT MOSES: Well, first, it's good to be here and good morning. I ought to acknowledge and thank, just to start, the nearly three million grocery teammates around the country who've been working heroically to meet the challenge and keep America fed. I often say that supermarkets are pillars of thousands of American communities. They are the last to leave in a crisis. They are the true salt of the earth. And as somebody who spent a great deal of time working with folks in this sector, I've never been more proud to be associated with it.
Look, grocery sales have obviously been extremely robust over the past couple of months. And while the supply chain has had some challenges, the fact is that, as I talk to my clients all around the country, the supply chain has bent a bit, but it is certainly not broken. And I can tell you that executives are working with their teams constantly to make sure that the stores are safe, that they're stocked, and that they're doing everything possible to help keep America fed.
- Scott, it's Julie, it's good to see you. So much to ask you about at this time when grocery stores are so challenged in so many ways to your point. Target today came out and said that it's same store sales since the beginning of the quarter up 7% but that doesn't sort of capture the whole story because Target usually relies on people coming into the stores, if they're buying grocery, also buying higher margin items. So their margins may be crimped by this in addition to the fact that they probably have higher employment costs right now. What does that look like across the grocery spectrum? How much pressure is this going to put on both the mass market and the grocery store chains.
SCOTT MOSES: Well, for operators whose business model is to use their low cost of capital to price groceries lower to drive more traffic for that food and then at the same time sell a fair amount of higher margin general merchandise, like Target, then it's going to be a bit of a challenge. In particular, because in order to meet the demand that we're seeing around the country, they are rightly paying their employees more to help them meet the challenge to feed us all.
Now, broadly across the sector, I think it's fair to say that grocery sales are going to continue to be robust for quite some time. You've got millions of folks-- myself, my family included-- who are becoming amateur chefs. We are all taking advantage of this opportunity to learn to cook and some of us-- we're getting pretty good at it. We made pizza yesterday, it was fantastic. And I'm a New Yorker so I can say that with some measure of authority.
In an elevated unemployment environment like we've got right now and we're going to continue to have unfortunately for quite some time, what has always happened historically is people will shift more of their purchases to food at home because they're saving a lot of money. I think it is-- as folks-- as challenging as it is right now, think about how much they're spending-- they're spending a lot less on food. And as a practical matter, given that it's likely to be some time before we see restaurants open up, I think that's going to continue. And I should just say from my restaurant friends around the sector remember there are 10 million folks who work in restaurants around the country. This is a horrible, horrible time and your hearts got to go out to those folks. I'm looking forward to seeing them back at work soon.
- Scott, I think all of us greatly appreciate what the people of grocery stores are doing for us. A while back you were on the program-- I think we talked about-- you know, did Amazon stumble when it acquired Whole Foods? Now I got to ask you-- Amazon seems to be, according to some analysts, the winner, especially-- one actually is calling that they could be the first $2 trillion dollar company. What's playing to Amazon's advantage other than the fact that they already have the infrastructure for online delivery of goods?
SCOTT MOSES: Well, Al, when we were last together, I think Amazon was worth something like $850 or $900 billion. Today it's about $1.2 trillion as you say. Look, retail is all about customer acquisition and customer retention and that is all about having a low cost of capital to supply that. Amazon's a AA credit, they're worth $1.2 trillion, they're up roughly 40% over the past month, and they have an enormous competitive advantage because they can invest in marketing, they can invest in better wages, they can invest in R&D-- they've got a north of $20 billion R&D budget.
So last quarter they spent roughly a billion dollars on next day delivery which has become a regular part of shopping now for the 150 some odd million Amazon Prime subscribers that they've got and so they have an enormous competitive advantage. And while I hesitate to call anybody a winner or loser in this crisis, clearly these competitive advantages driven by the low cost of capital have meaningfully enhanced their business relative to other folks. And the other thing to keep in mind is that Amazon is always thinking not just around the corner but many chess moves ahead. And so I can only imagine how they're using the data that they're learning from even more customers who are coming to them, making it cheap for them to acquire and retain those customers, when this ultimately recedes.
- Scott, it's Brian Cheung. You were talking about the delivery portion of the equation here. I'm wondering do you think that those smaller businesses have been able to capitalize off of the trend that is people ordering from home and having it delivered, whether that's through FreshDirect or directly through a service that they grocery store itself provides? Or do you think that that actually provides more margin pressure because of the cost of having to invest in that technology?
SCOTT MOSES: Well, I think it depends on the operator you're talking about right. So delivery has clearly been a really important part of getting America through this crisis. Guys like Boxed are doing extraordinarily well. Kroger and Walmart are doing pickup in a very, very strong way. Meal kits are becoming a part of the calculus. Kroger's got Home Chef, Albertsons' got Plated, there are others.
Remember, every family has got to find a way to put 21 meals on the table every week and delivery is clearly going to be a part of that. The challenge is that there isn't sufficient capacity in the delivery system to get 300 some odd million folks 21 meals a week. The stores have got to remain a part of that. And whether it's FreshDirect here in New York clearly serving part of it, so too do the grocery stores need to be a part of that all across the country and they will.
- Scott Moses is the head of grocery investment banking at PJ Solomon and I'd put my ropa vieja up against your pizza any day.