Will The Ozempic Trend Put The Bite On Grocery Stocks?

Originally developed to treat type II diabetes, drugs such as Ozempic, Mounjaro and Wegovy have gained traction for their weight-loss capabilities. Ozempic, manufactured by Novo Nordisk, is by far the most popular weight-loss drug on the market, as its stellar popularity has created a significant shortage. 

Ozempic's surmounting popularity has profoundly impacted consumer behavior, especially in the grocery sector. As more people turn to these medications to manage their weight, which effectively suppress appetite and alter taste preferences, the ripple effects are being felt across grocery stores nationwide. 

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According to a study published by analytics firm Grocery Doppio, individuals on Ozempic buy 47% fewer baked goods, 13% less processed foods and 28% fewer high-calorie beverages. The study further revealed that 97% of consumers on weight-loss medication lowered their grocery spending by approximately 11%. 

This, coupled with sustained inflation challenges, has impacted the profit margins of grocery retailers. 

Kroger 

The Kroger Co. KR, one of the largest grocery chains in the United States, is particularly vulnerable to the changing landscape. 

The company has traditionally relied on high-margin items such as snacks, baked goods, and processed foods – precisely the categories seeing the steepest sales declines among those on weight-loss medications. 

Kroger's total sales amounted to $45.3 billion in the fiscal first quarter (ended May 2024), marking a marginal increase from $45.2 billion reported in the same period last year. However, the company's operating profit declined by nearly 12% year-over-year to $1.29 billion, while its adjusted EPS fell by over 5% to $1.43. 

Kroger is attempting to streamline its operations in tune with changing market dynamics by expanding its range of healthy food options, including organic produce and lean proteins, to cater to health-conscious consumers. Nonetheless, Wall Street experts expect Kroger to feel the pinch soon, as the company's bottom line is expected to decline by 6.7% year-over-year to $4.44 in the current fiscal year. 

Walmart

Walmart Inc. WMT, with its vast scale and diverse product offerings, is uniquely positioned to weather the storm. While the retail giant may see a decline in sales of sugary beverages, snacks, and other affected categories, its extensive selection of general merchandise and other products mitigates the losses substantially. 

Walmart's adjusted operating income rose 13.7% year-over-year to $7.1 billion in the fiscal first quarter, primarily driven by growth in membership income. The company's total revenues increased 6% from last year to $161.5 billion, while adjusted earnings amounted to $0.60 per share, marking a 22.4% rise year-over-year. 

Walmart's growing emphasis on e-commerce and grocery delivery services has positioned it well to adapt to changing consumer behavior. The company's global e-commerce sales rose 21% in the last reported quarter. Also, Walmart joined the ranks of Dividend King earlier this year, having raised its dividend payouts for 51 consecutive years. 

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Kraft Heinz 

The Kraft Heinz Company, a major player in the processed food industry, has faced significant challenges in light of the Ozempic trend. The company's net sales plummeted 3.6% year-over-year to $6.48 billion in the fiscal second quarter of 2024.

Kraft Heinz's profit margins also took a serious hit. Its net income fell by 90% year-over-year to $100 million, while operating income declined by over 62% year-over-year to $522 million. 

“Our second-quarter net sales growth came in lower than originally anticipated, as consumer sentiment remains cautious,” said Carlos Abrams-Rivera, CEO of Kraft Heinz, in a news release. 

The company pays $1.60 in dividends annually, yielding 4.54% on the current price. Kraft Heinz's four-year average dividend yield stands at 4.38%. However, the staple grocery retailer's dividend payouts have remained stagnant since early 2019. 

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