COVID in Numbers - part I

To cope with COVID, my brain has filed it away as a bad movie. But when you look at the data, it wasn’t fiction. It was a structural break. As I’ve built long-term models of the grocery market, the shift is unmistakable. We all lived through it. The models show how it unfolded. Part I focuses on the supply chain and food inflation. Part II will examine the demand side and grocery units.

We’ll start with CPI Food at Home (CPI FAH). The first chart looks like a heart monitor with too many lines. In 2020, the grocery market had a heart attack.

Each line represents a food inflation driver. The vertical movement shows its relative weight in explaining CPI FAH. The larger the value, the more influence that driver had on food inflation at that point in time. The major supply chain components are:

• Oil

• Farm Products

• Food Manufacturing (CPGs)

• Grocery Retail Margins

Stack them together and you get food inflation. Before COVID, food manufacturing dominated. The CPG layer was the primary driver of CPI FAH. The model suggests that food inflation was largely shaped upstream by manufacturers, which aligns with industry structure. Roughly 20 large CPG firms control about half of branded food sales. That concentration matters.

Then COVID hit. The system shock was immediate. CPG influence dropped sharply. Grocery retail margins surged in importance and became the dominant driver of food inflation. For nearly three years, retail played a larger role in determining food price movement than it had historically. Supply disruptions, panic buying, labor shortages, and demand shifts altered the pricing dynamic.

Farm products also increased as supply chains strained and agricultural inputs tightened. Their influence peaked in 2022 and has gradually softened since.

Oil, while volatile, appears muted in the chart. That does not mean it is irrelevant. Energy costs are embedded across the chain—transportation, packaging, manufacturing. Its influence is partially absorbed upstream before reaching final food prices.

By late 2023, the dynamic began to shift again. Food inflation started to pressure unit demand. Retailers could no longer expand margins without consequences. Grocery margin influence began to ease. Since 2023, retail’s contribution to CPI FAH has softened but remains elevated relative to pre-COVID norms.

Meanwhile, CPG influence has started to reassert itself. The pre-COVID structure is not fully restored, but the direction is clear. Manufacturers historically held pricing power due to brand concentration. Retailers gained leverage during the disruption. In a more consolidated retail landscape—where the top five now account for roughly half of total grocery sales—that power will not revert quietly.

So what does this mean for grocery retailers? The COVID boom is over. What remains is the hangover. During the pandemic, grocery financials strengthened across much of the industry. Spending was concentrated in food-at-home. Margins expanded. Cash flow improved. The retailers that reinvested in efficiency, automation, price competitiveness, and supply chain resilience are positioned better today.

Those more focused on the demand side likely expanded fixed costs aggressively without securing durable unit growth so they are likely under pressure. Moreover, many retailers leaned into price increases to protect margin targets. That strategy worked temporarily. It also eroded units, share, and price perception. In a normalized demand environment, that tradeoff becomes painful. This is a new equilibrium.

Margins were thin before COVID. For many, they are thinner now. Volatility has increased due to food inflation persistence and policy uncertainty. The strain is disproportionately felt by regional grocers competing against national banners with greater scale, data advantages, and capital flexibility. The combined effects of the Great Recession and COVID have accelerated market concentration and tightened the competitive vise on mid-tier players.

The data helps to confirm what most of us already new. The numbers also suggest the structural consequences will be with us for a while.