Albertsons Companies, Inc. (ACI) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining us at Oppenheimer's 21st Annual Consumer Growth and E-Commerce Conference. My name is Rupesh Parikh. I'm the Senior Food, Grocery and Consumer Products Analyst here at Oppenheimer. I'm excited to introduce our next presenting company, Albertsons. Joining us today is the company's President and CEO, Vivek Sankaran. We continue to look very favorably upon Albertsons longer-term prospects and believe the company is well positioned to sustain some of the share gains it picked up during the pandemic. The format of today's session will be a fireside chat.

So I'm going to first start by kicking it off with a few macro questions. So Vivek, so first, as the U.S. has continued to reopen in recent months, has anything surprised you thus far in terms of what you're seeing, whether from a category, channel or consumer behavior perspective?

Rupesh, first, thanks for having me, and good afternoon, everyone. Rupesh, I think the strength of the consumer has been an incredible surprise for me. They are -- they haven't traded down in the business. They're still spending on discretionary items like flowers in our store. And I don't think I expect that the consumer to come out of this -- we're out of the pandemic, I guess, at this late stage of this pandemic, that they would have so much in the bank and so much cash. And so I feel optimistic that, that behavior will be good for us, especially as they continue to cook at home and leaning on fresh items like ours. So that's one. The second one, and it isn't surprising, but the rate at which e-commerce picked up and the rate at which it's holding on is not -- I guess none of us will be surprised that the rate it has changed but that behavior seems to have stuck, too. A couple of areas I can point out.

Okay. That's interesting. And curious if you're seeing any changes of note on the competitive promotional front at this juncture.

No, Rupesh. I think there's 2 things going on. One, the demand is significant. So the demand is far exceeding supply. It's odd that -- but I will tell you that the supply chain has still not reached steady state by any means, okay? We always seem to have some surprises. Sometimes, it's proteins. Some of the other categories. And some categories have been chronically short for several months now. And so because you have this gap between demand and supply, it just becomes very difficult to compete on the basis of price because you're not going to drive that much more elasticity because you just can't meet that supply, even if there was that demand for it. The second thing I think you're seeing is that all of us have -- while we've pulled back on promotions, we're not going to go back to it -- the way it was. We're going to be more deliberate. And in the way we bring it back in, and we're bringing it back in with a lot of data, with a lot of technology to underpin how we do promotions. And a lot of it has gone digital, right? So it's more precise. In that sense, it's a better return. And it's more targeted to -- for the people that care for it on the category, the items they care for it. So I think you're going to see more precision in the promotions, which is why my sense as you know, maybe not ever see what we saw in the past in prior recessionary scenarios, let me say.

Okay. Great. And then the other area that's obviously very topical. It seems like daily on the news and in our investor conversations, food inflation. Can you remind us of the company's inflation expectation and then confidence in being able to manage through an inflationary backdrop?

Yes. We like modeling our business on a 1% to 2% inflation because then that -- what that does for you is you make sure that the middle of your P&L, et cetera, et cetera, are geared towards that. And if we end up with more inflation than that, it's typically a good thing for a business like ours. And businesses like ours have done well when in periods where the inflation was 3% to 4%, which is what you're seeing. So if you looked at, I think, the 0.7% last month, and if you did a 2-year stack, I think it's in the 5.5% range or so. And so that's a 2.5%. I think the month before that, 2-year stack was 7% and change. So we're in that on a 2-year stack basis, that 2.5% to 3.5% range of inflation, which is incredibly easily manageable for a business like ours, okay? And especially with the consumer as strong as she is now, my sense is this inflation will just be passed through. And that's what you're seeing happening in the marketplace. Now there are concerns about that the inflation could go even higher than what we're seeing now. And that could happen. But the inflation we're seeing today is primarily because, I believe, of supply constraints. You're seeing shortages in transportation, that's driving up prices. And the question is, is that supply constraint going to be a strength? Is it transitory? Or are you going to see that hanging on for a long time? If it hangs on for a long time, you'll see inflation go a little higher. So let's talk about that, Rupesh. So we've never had an environment like this with such a strong consumer where inflation goes higher. And inflation will have to go really high for it to start mattering where the consumer starts clamping down on purchases or starts trading down. If that happens, we'll compete that way. But the nice thing with us is we've got plenty of programs in our company that can help us offset that margin degradation, if there is, okay, so that we can continue to deliver our bottom line.

Okay. Great. And then in terms of -- so you said that you're seeing prices being passed in the marketplace. I know in the past, sometimes, like if beef spikes, you may see trade down into turkey or chicken, for example. Anything unusual at this point? Or is that consumer really being able to handle all these price increases?

So far, we're not seeing that behavior of trade down. But that's typical -- typically what happens. When you see inflation getting to a place where they look at the prime beef and say, gosh, that's too much. Then we go to choice beef or a hamburger or an alterative protein. It's very rare, by the way, that everything inflates at the same time. So even in our store today, while you're seeing protein inflation up, remember, last year at this time, we couldn't hold on to paper products, right? . And so paper products were going at whatever price you could put. Now there's good pricing there. So you're seeing relative to last year, a better pricing in paper. So on the overall store, which you see a better balance on the basket.

Okay. That's helpful. And then as we are now a few months into lapping the difficult pandemic comparisons, do you have any new thoughts on what the company sees as lasting benefits coming out of the pandemic?

Yes. So Rupesh, there's a few things that I think are going to stick. Number one, eating at home. Now one, we're seeing that. So to me, the behavior of eating at home seems to be sticking more than -- certainly, more than we imagined. And there is, to me, a period where people are still sticking to that cooking-at-home behavior. But I do believe -- you can see the tenor of conversations going up, a whole different notch on working at home, right, or remote work. And you can see that it just is occupying more and taking a lot more attention. And I think you're going to end up with people spending a little more time working from home, which also means structurally, you end up with more consumption of calories at home. And I think that's going to stick. The second thing that's going to stick is e-commerce and the convenience of online. Our best customers are the ones who engage in both. By the way, a lot of people have come back to stores, Rupesh. No question about it. people are back to stores. But the best ones are doing -- using the e-commerce for convenience and enjoying the shopping location every so often in the store on the fresh and stuff. And so that's the best combination. We like that. And so I think e-commerce is getting to a place where it's got enough scale now just for us to not only invest in a big way behind it, but get the leverage and return on that investment, right? So that's another one. I think consolidation of shopping occasions, before the pandemic, you would find people shopping 5, 6 different stores that consolidated massively. And the deconsolidation is not as much as I had imagined. And we do a pulse survey every month on our customers, and we're not seeing an orientation towards deconsolidating any more than it was, say, 4 weeks ago.

Okay. No, that's -- yes. really interesting. And I guess just from a traffic perspective, do you expect to recover almost all the traffic by the time we -- I guess, a few months from now or somewhere down the road? Or how do you guys think about that in terms of what the new normal for traffic would look like?

Right. If you combine the e-commerce order and the trip to the store, by the way, all of our e-commerce is from the store, too. My sense is towards the latter half of the year, you start seeing positive traffic again without a question as -- people don't feel the need to come in and buy the massive baskets because there's shortage of supply or something like that. But obviously, we're not seeing that yet because the traffic at this time last year that every number was up, right, massively up. But I see that moderating back as you go to the back half of the year. And it's becoming smaller traffic going back up.

Okay. And then typically then if you do have that traffic in store, then you get more impulse -- you probably see more impulse purchases? Or do you...

Correct. Yes, absolutely. I think you get more impulse -- I'm a believer. I'm a big believer that more contact is always better than less contact. So if we can get them more often into the store, get them more often to engage on this, even when they come to the store, that is always a benefit. Making -- having -- something to do with us every day is a very good thing.

Okay. Great. Now switching to some company-specific topics. So your loyalty program. So Albertsons now has more than 25 million members in its loyalty program. Your commentary thus far has been very bullish on what you guys are seeing out of the program so far. What are the bigger opportunities you see down the road to drive further membership gains and consolidate shopper spend?

Significant, Rupesh. Because to me, if you look -- think of 2 dimensions on the program. One is enrollment, the other 1 is engagement. So if you go to Chicago and east of Chicago and all our banners there, the enrollment is relatively low, very low. And so we've been driving a lot to drive up enrollment there. And we've been very pleased with the growth rate. So that $25.4 million was 20% higher than pre-pandemic, right? So that the growth rate of enrolling people is working well for us. And then we've got a lot more engagement. And what we're doing in engagement is they're getting beyond what has traditionally been just purely valued. So it's fuel rewards or grocery rewards. And we're now giving people experiences. So you could have a cooking class or a wine tasting experience and so on. So we see going further and further into making sure that, that loyalty program builds great stickiness and affinity. And it goes beyond rewards. And we'll be doing more. You'll see more of that coming out over the next several months around the loyalty program. It -- one, it creates stickiness. And the reason it creates stickiness is because when we have that data, we can personalize things for the customer. So we have -- you have the data. And now you have the technology to start giving them specific things that matter to them. You may have -- you didn't engage with us in laundry before the pandemic, you're engaging in laundry now. And we're going to find a way to keep you engaged in laundry, right? So you end up consolidating that trip. So that's the power of the program, especially as it gets to scale.

Okay. Great. And what -- as you look at the program, what inning do you think you are right now in terms of the potential for loyalty? .

Both -- I would say -- if it's a baseball game, I'd say we're kind of like the third, fourth inning. The crazy thing is that we have not fundamentally changed the framework of that program for a number of years. And now we're putting a lot of energy into changing the framework of the program. By that, I mean, one, we're going to expand it. And so that enrollment should continue to grow significantly. Remember -- I'll give you 2 numbers. 51 million identifiable households, 25 million members. So there's a gap, okay, right there. So there's room to expand that. But then the bigger opportunity is to start giving our members different kinds of value, right, that -- and what we find that there are different triggers for different people. It's not always value -- not always price, by that, I mean. For some people, engaging in convenience became the biggest trigger to go up and spend more with us and go up in the tier.

Okay. That's interesting. And switching to another topic, e-commerce. So Albertsons has had meaningful success on the e-commerce front in recent quarters. So a few questions in this area. So now number one, you've now started to lap the prior year where you saw a meaningful uptick in e-commerce through the pandemic. So as you look at your different offerings, delivery, Drive-Up and Go, which of those have been more stickier than maybe your expectations? And then I know you commented on previously that e-commerce in general has been very sticky but just anything else -- share just anything unusual or anything else that surprised you on the e-commerce front as you [ opt ] the comparison?

The Drive-Up and Go is -- continues to grow significantly for us. First, we have headroom to expand it. But even if you set that aside, just the rate of pickup in Drive-Up and Go, customer engagement in Drive-Up and Go is significant. And by the way, if you hear that from other retailers, too, not just in our sector, in other sectors, too, that this notion of picking up in the store seems to be -- or consumers seem to like that a lot in the U.S. And I think, Rupesh, it's the one transaction, e-commerce transaction, where the customer is in complete control, if you know what I mean. You show up, when you want to show up to the parking lot and we run to your car. You're not waiting for us more than 3 to 4 minutes. And so that part has been -- and it's good because Drive-Up and Go eliminates the delivery cost, which is harder to recover, frankly, right? So I like that about it. I am, I guess, pleasantly surprised that customers are coming back to stores that quickly. The traffic back to stores is up. And I think people just want to have that engagement back in stores and feel more comfortable doing that. And so we're seeing that uptick, which is a nice -- because that allows us then to leverage some of the other programs like meals and such that we have. But that will be the one not, I guess, surprise in e-commerce for me.

Okay. And then on the e-commerce penetration front, I know Albertsons hasn't disclosed the number but just any thoughts from an industry perspective in terms of where -- in the intermediate where penetration can go?

Yes. I read reports that it's around 10% now. We're lower than that, Rupesh, we have catch-up to do on that front. And we -- while we accelerated through the pandemic, we'll keep that engine going so that we want -- we would like for the penetration to get higher than 10% too because remember, the penetration is digital engagement. Digital engagement is worth a lot, right, in many different ways. I think the penetration could -- to me, we had -- we thought it will be 10% in '25. Here, we are at 10% already. I would be surprised if it got to 20% in '24, '25. And frankly, I think that will be great because that gives you scale. It gives you enough scale to start optimizing things rather than bolting on and adding things, number one. And it gives you massive digital engagement, which has its own ways of monetizing itself.

Okay. That's helpful perspectives there. And then as you guys look for -- so you may be the industry now for penetration, but what are the bigger opportunities to close that gap? Is it -- I know Drive-Up and Go, you continue to expand that. So I know there's a runway there. But what do you think needs to happen to at least close the gap versus the industry?

Marketplace expansion first. Number two, we need to continue to improve our proposition. And that's going to be a never-ending quest to continue to improve the proposition. We believe greatly in speed. So by that, I mean, sub 2 hours and sub 2-hour delivery We're going to continue to expand that, and that matters. And we would -- we think we'll have about 85% coverage on 2-hour delivery later to the summer here. So we're excited about that. And then I think we just need to continue to improve just the interface with the customer. We launched a new app and we tested it in 3 markets, Rupesh, which is a unified app. So we had apps that were for loyalty and e-commerce. It's all come -- it's become integrated. So you as a customer can use your rewards really easily in the transaction. So we've got some of that -- those fundamentals to improve, and we are continuing to do that.

Okay, great. And then as you look at -- on the e-commerce front, the competitive backdrop out there, like any -- I know last year, I think Albertsons, Kroger, a number of you guys waived the pickup fee. Have you seen any changes just in terms of the value proposition out there? I think Sprouts I saw they have free pickup this summer, I believe at their stores. But just curious if you've seen any changes on the e-commerce competitive on the value proposition side.

No. I don't -- I haven't on the pickup side. My sense is we will all continue to offer pickup for free. I think the delivery -- the nice thing about the pickup for free, you still have somebody coming to the store, you keep that engagement in the store, that connectedness to the store. I don't see that changing. We'll probably work on -- we are and I bet the industry continues to work on reducing the cost of [ pick ] and make sure we get increasing the basket size so we can make the economics work on that. I think the delivery will still have a charge because it just -- it costs us money, and it typically costs more than we could charge, at least today, for customers on delivery.

Okay. Okay. And I guess, probably 1 or 2 more questions on the e-commerce front. You guys have talked a lot about doing stuff with MFCs in 2021. Can you talk about some of the investments and bets you're making here? And why you believe MFCs are the right strategy for Albertsons.

Yes. Before I talk about MFCs, let me tell you the e-commerce principles that are guiding us. Number one, I'll go back to this point on speed. To me, you will wait for a refrigerator for a 4-hour window because you buy it every 10 years, and you want to make sure it sits right in your home. You have -- you invest the 4 hours to do that. You won't do that 3 times a week for food. So we believe in this notion of speed. That means from the time you click to the time you either pick it up in the store or you deliver it to the home, we want it to be 2 hours or less than 2 hours, and we'll continue to drive speed, number one; number two, we don't want you to have to compromise anything you're going to do in the -- that you get from the store today, a flower arrangement, cake that's baked for your kid, steak cut the way you want, all of the personalization we can do for you in your store. And third, we do not want you to have to compromise the curation we've already done for you in the store for that particular catchment area. The products that we carry are different, and it's been honed over many, many, many years. If you accept those principles, then the store becomes the fulcrum for e-commerce because it's close to where you live. It's the shortest last mile. And we've done all of the other things I've talked about. The NFC bolts on to that store to give you the peak productivity that you hit the limits of physics picking in a store. It gives you that peak productivity for that store and a surrounding set of stores. And the technology itself is pretty simple. It's not -- I mean, it's an ASRS system that's been used in warehouses for a long time. And so the technology is simple, optimizing what you carry in it, making sure you're able to optimize what -- how you support the remaining stores around it, how you optimize the pick from the MFC and the pick of the store. Those are the things that take more time. And it's frankly a learning curve that -- but we are very excited about it because we're seeing us going down on that learning curve very nicely and quickly.

Okay. Great. And then on the subscription front, Walmart+ has rolled out, and you also have Amazon Prime with free grocery delivery in the market. How does Albertsons feel about the ability to compete with these offerings and their free delivery proposition?

Yes. At the end of the day, all of those are membership programs, right? So now we have our membership program, the 25.4 million customers and growing. And what we are working towards is how to think about giving different types of value for different tiers of engagement of those customers. At the end of the day, it's all about to me, continued engagement. And we have come at it one way and some others have come at it a different way, Rupesh. But it's just -- the essence of it, it's a program to create stickiness and you give value in different ways to it.

Great. So on the fresh side, your teams had significant success during the pandemic, and I spent time walking your stores. And clearly, a much improved offering, I think, on your fresh side. As you look forward, what are the bigger opportunities to continue driving share gains within the fresh category from here?

One is maintaining the quality and the variety of fresh and continuing to invest behind it. And so think of investments in supply chain investments, in store labor, et cetera. I'll give you a simple example, okay? We cut our fruit in our store. Now we have technology that is guiding the operators on exactly how many watermelons to pick for the fruit and so on. So when you do that and you get -- you match supply and demand exactly and more precisely, you end up with fresher product on the shelf, okay? That sells more, reduces shrink. So those types of things. From a customer standpoint, we continue to invest in. We -- the -- in my opinion, the meat -- if you think of us as primarily selling ingredients and away from home restaurants selling meals, I think that space is converged, okay? And so our ability to support customers with meals that are ready to heat, eat or cook that are convenient made in the store that look fantastic and are just -- can be ready in 15 minutes, we think that's a big opportunity. So we're continuing to elevate that on fresh. So if you go into our stores, you'll see some of our stores in Texas, some of our stores in Chicago, et cetera, you are starting to see our meals program starting to develop another way to continue to elevate fresh in our store. And then we are putting a lot more energy into just supply chain and ordering in fresh. We've got some pilots going there that are about automating the ordering process. So again, you've got the freshest product always on shelf.

So if you look at the meal solutions in markets like Texas, any initial learnings? Like how is that progressing versus your expectations?

It's wonderfully incremental. It's hard to pull off operationally. You -- if you have not already invested, if you don't have labor in your store already for things like meat and so on, it's very hard to pull it off. And so what we've learned the process, we've learned how to optimize it so that the shrink is extremely -- the shrink is down and the margins are attractive. And so both from a margin standpoint and a growth standpoint and an incrementality standpoint, we feel very, very good about it. Very positive.

Okay. Great. Now switching to maybe a few financial questions. So on the gross margin front, your commentary implies that the company is hoping to directionally get back to prior year gross margins ex gas. What gives you confidence in being able to do so?

Tailwinds. So we are always working on -- our philosophy in our company is that we always need to have gross margin tailwinds, shrink improvement capabilities, supply chain improvements, COGS reduction. We've got these programs going that are always oriented towards improving gross margins. And then we make a choice, Rupesh. In some markets we'll choose to invest. We are very deliberate about where to invest. It might be an investment in pricing, et cetera. So we are always toggling it. And then we always have that because if, in fact, we have to at some point invest back in gross margin to be competitive, going back to your inflation question earlier, if, in fact, there's a squeeze down the road and we have to remain competitive and not compromise the bottom line, we'll choose to invest at that way, right? So -- but that's the principle. We've got all of these initiatives. We always have initiatives, including mix management, by the way, that is always driving gross margins up.

Okay. And then typically, in an inflationary environment, I know some retailers may call out, when you see inflation you could see an initial impact on margins. And then over time, you pass through prices and margin rates improve. I guess historically for Albertsons, anything you can comment on just in terms of what happens to margins in an inflationary environment?

Yes. First, remember that a lot of our product -- a big portion of our business, a larger portion than most is fresh and which have very short cycle -- I mean the days on hand is very, very short. So there's not much of a lag from the time it hits our DC to the time it goes through. So any inflation we're able to pass through, if we choose to pass through, very efficiently. So that's one thing that helps us. The second thing that helps us is -- let's take the meats. And we have butchers in our store and meat managers in our store who have been -- some of them have been around for 40 years, Rupesh, and they've seen every one of these. And they are all incented on managing both top line and EBITDA, okay? Not just sales, but managing top and EBITDA. So you see in our stores when you hit these inflationary cycles, you'll see them managing with guidance from the center, but just also intuitively, they understand how to change mix. So more of protein x versus protein y, different package sizes so that you can make it more affordable versus the larger pack sizes you might have seen before it. So there's a lot of that management that happens every day in the store, which is why it gives us confidence. And the place you get caught is on fresh typically. It gives us confidence we've got these levers to manage it.

Okay. No, that's really helpful perspective. And then on the productivity front, your team raised its target to $1.5 billion over 3 years. What gives you confidence to be able to deliver the $500 million or so savings each year?

Yes. So first thing, broad team, you should -- all of you should know is that what we are doing is new to Albertsons, but most of what we're doing is not new to the industry. There are a couple of places where we're pushing the envelope in warehouse automation and such, without a doubt. But if you take the full portfolio of initiatives we have, the first $1 billion was around labor in stores, shrink management, G&A reduction, indirect goods purchasing, productivity in our promotions we do so that we can be more precise there and using technology there. Now what we've added to it is 2 new buckets. One is cost of goods because we have a model. While we love the independence that we have locally, there are several categories where we should be working with suppliers on a more -- leveraging our national scale, giving them bigger opportunities, right? And so to me, that's one pool of monies that we are pursuing. And the second is on supply chain. We have DCs that tend to run independently. And so we've got best practices going there into our DCs. We're optimizing our transportation loads and network. We're also looking at our DC network and trying to think about -- or working through exactly what the optimal supply structure should be. rather than one DC for one market, right? So there's a number of different things we're doing on the supply chain. Both of those have added more to the productivity bucket, if I can call it.

Okay. Great. So a few more questions. So maybe switching to your real estate. So given what you're seeing from a demographic perspective, so obviously, more people moving to suburbs, rural areas. There are retail store closings out there, greater e-commerce penetration today. How does that impact your real estate priorities? And what are your implications for your real estate footprint going forward?

Yes. The good thing for us is we are -- both -- we have urban locations, and we have suburban locations, okay? So during the pandemic, when we lost -- what we lost in urban locations like where they say it's a heavy -- let's say Hawaii, for example, right? And that's a tourist location. But even an urban location like San Francisco, where there was a lot of tourism and other things driving it. When we lost that business, we picked it up in the suburban markets because people essentially move there and live there. Where we lost business because of tourism, now it's a tailwind for us. So frankly, our portfolio works for now. I think to me, we're going to have to wait a little -- a few more months for things to settle before we can draw broad conclusions on New York City or San Francisco or downtown Chicago. I think it's still a little early to call that. But I think if you look at our real estate more broadly there, Rupesh, what you'll find is that where we're present, we have a lot of density. We are not all over the country, but if you go west of the country, Chicago, Northeast, we've got density where we operate, right? And to the extent people move there, and we need more capacity in those markets, we are in a good place to open that capacity because we leverage the density already available. So that's -- those are the type of things we're working through. But we need to settle -- needs to settle a little bit before we draw our conclusions.

Okay. That's helpful perspective. And then just on the private label front, so I think you guys, say, are roughly a 25% penetration. I think the goal is to get to 30% over time. Do you see a slow drift annually to get to that 30% penetration? And then how do you think it -- if we do see this inflation backdrop, if inflation continues to be high, how does that impact your private label penetration?

I think it helps because it's -- typically, it's a lower price point. So for -- and if you offer the right quality for a customer who wants to watch the wallet, I mean, clearly, these things are a great option. I do see it continuing to grow gradually. There might be some categories where we put a bigger push than not. And so the penetration -- you gave the 25% number, that dropped early in the pandemic, it came back to that towards the end of Q4 and continues to be strong. And so the way we are doing this is we'll continue to grow. The penetration opportunities first is in geographies. And that's simply a matter of making it a priority, making sure customers get visibility to it and solving some supply chain challenges in private label, right, just to make sure that there's manufacturing capacity around the country. So the penetration upside I think is relatively simple from an expansion standpoint. And then there's the innovation side. We do 800 to 1,000 innovations a year on private label. And that gets us into new categories that continue to drive penetration now.

And then, Vivek, just I guess just given your background in the CPG world. If I go back a few years, I mean, everyone complained about the lack of innovation coming out from the larger players out there. Do you think anything shifted in recent years when you -- or not recent years, just recent quarters? Like are the bigger players doing a better job on the innovation front? Just any thoughts there.

Well, yes. I'll tell you, if you go back to the late '90s and much of the 2000s, I think a lot of the large players lost ground because they didn't innovate, right? And you had the marketplace innovating in -- and then people had to buy them to keep up with the trends. And then I think you saw a lot of innovation happening. You saw people who innovated starting to separate themselves. If you go through from, I'd say, [ 2010 ] to 2020, before the pandemic. And so I actually think there were a lot of companies doing a lot of great innovation. And it was part of their lifeblood because you just have to -- consumers in America want -- America is extremely diverse. So to think that one product will appeal to the -- to everybody is a big mistake, which is what was driving separation in innovation. And second, innovation keeps excitement, and it's probably the lifeblood of the industry. In the pandemic, people took a back seat, I think, because of capacity issues. Rupesh, I'm willing to bet that it will be back. There's no chance. CPG companies have to innovate just to keep that excitement going. And if they don't do it, the marketplace will. So I see it coming back. I think it's just -- right now, there's such a constraint on capacity. I don't see it happening now, but by the end of the year. Next year, people will start bringing it back in.

Okay. And then one final to just wrap up. Just on the capital allocation front. Obviously, your team has done really an incredible job delevering the balance sheet, you have a nice dividend as well. Just remind us of the capital allocation in priorities, including M&A, going forward.

It's first about growth. And it's about growth in digital, growth from improving our fleet, growth in programs like meals. So it's first always about growth. The second area is some of the productivity initiatives also require capital. So capital that removes labor, right? So that's a -- think of that as another avenue that we put our monies into. And so those are always going to be our priorities on use of capital. And then we'll keep our commitments on the dividends. We feel good about where we are on debt, Rupesh. So our leverage ratio is down to about 1.5% or so. And we'll continue to remain opportunistic on the share buyback, but. It's digital growth, it's fleet based growth and its productivity. And then on the M&A, to the extent we find opportunities to tuck in to contiguous markets or in market, we'll do it. Recognize that when you have all of these other things we've got going, the data engine, the loyalty engine, the e-commerce engine and when we have these programs, you bolt on an M&A, you get immediate accretion, which is what we're seeing in Kings and Balducci's, as an example.

Okay. Great. Well, thank you, Vivek, for joining us today. And best of luck for the balance of the year.

Thank you so much. Thank you all.

Thank you.