Grocery & Food Service

Grocery & Food Service

Quarterly Industry Report

March 2019

Opportunity: Meat Alternatives - Shifts in consumer attitudes toward meat -- a leading category for grocery store and supermarket sales -- are creating challenges and opportunities for the industry, according to Progressive Grocer. While the volume of meat sold in 2018 fell by 1.5%, the sales volume of nontraditional protein options increased nearly 20%, according to figures from Nielsen. Sales of meat alternatives rose 22% in 2018 to nearly $8.8 million. While that’s a tiny fraction of the $67 billion in total meat sales, meat alternatives represent a growth opportunity for grocers looking to compensate for declining meat sales and to draw in new consumers, including vegans and vegetarians. Still, only 46% of respondents to Progressive Grocer’s Retail Meat Review survey of retailers carry plant-based meat substitutes like Beyond Meat and Impossible Burger. However, nearly 60% of respondents said they currently sell or would consider selling plant-based meat alternatives alongside meat. Concerns over the environment, personal health, and animal welfare are driving consumer interest in leaner proteins and plant-based meat substitutes.

Grocery Industry Growth Rating

Industry Growth Rating

Demand: Tied to population growth and consumer tastes

Need good merchandising and high volume sales

Risk: Increasing competition and low margins

Industry Impact - As consumers eat meat less often, grocery stores and supermarkets will want to respond by offering more plant-based meat substitutes and lean animal proteins such as poultry.

Critical Issues

Competition from Alternative Retailers - As discount stores realized the traffic-driving power of food sales, competition for grocery stores has become more intense. By buying in enormous volume, mass merchandisers and warehouse clubs have become low price leaders: Walmart is the largest grocery retailer in the US. In addition, time-starved consumers are spending a greater percentage of food dollars online and away from home at restaurants.

Low Margins - Grocery stores operate with extremely low margins and depend on volume to generate profits. Profit margins can be razor-thin: in some cases, grocery stores net less than a penny per dollar of retail sales. Competition limits a company's ability to raise prices.

Business Challenges

Large Companies Dominate - Small companies struggle to survive due to a combination of intense price competition and low margins in the grocery retailing industry. Efficiencies of buying and distribution allow large companies to set low prices without sacrificing margins. Manufacturers typically offer discounts and special terms for large purchases, requiring volume too high for many small retailers to sell. Large foreign companies have expanded by acquiring regional chains and opening new stores. Because industry dynamics favor large scale operations, small chains often become victims of consolidation. Sales by the 20 largest food retailers accounted for about two-thirds of US grocery stores sales in 2016, up from 42% in 1996, according to the USDA.

Dependence on Discounting, Promotion - Because price is a primary driver in the grocery shopping decision, companies have come to rely on price discounts and promotions to drive volume. While manufacturers bear most of the cost of trade promotions, frequent discounts have conditioned consumers to look for the best deal and have diminished store loyalty. Deep discounts and specials often create short-term volume increases at the expense of long-term business.

Industry Forecast

US personal consumption expenditures at grocery stores and supermarkets are forecast to grow at an annual compounded rate of 3% between 2019 and 2023. Data Published: January 2019

Grocery Industry Forecast

Safety Concerns - The risk of contamination, especially in fresh foods, is a significant liability for grocery stores. Foodborne diseases, such as, salmonella, E. coli, and listeria, have resulted in hospitalization and, in a small number of cases, death. As companies move large amounts of nonpreserved and imported foods through the supply chain, the chance for contamination increases. Well-publicized incidents of bacterial outbreaks, recalls, and food scares have eroded consumer confidence.

Shrinkage Losses - With thin margins, companies can little afford losses due to theft or inventory spoilage. Almost all grocery stores experience shoplifting, theft, robbery, or fraud. Organized crime rings, which target expensive items like baby formula and medicine, can cause significant losses. Lax inventory management, particularly in the perishables departments, can result in shrinkage due to unsalable products.

Business Trends

Rising Wholesale Food Costs - Volatile commodity and energy costs can drive increases in wholesale food prices. US producer prices for food rose 9% between 2010 and 2011 and 4% from 2013 to 2014. Supermarket prices in 2017 are expected to change between -0.25% to 0.75%, and rise between 1% and 2% in 2018, according to the USDA. Even in an extremely competitive environment, grocery stores have been forced to raise retail prices to partially cover rising costs.

Store Format Evolving - To better compete with the growing number of choices for food shopping, companies are developing nontraditional formats to offer different customer experiences. Smaller stores offer a specialized selection, provide a higher level of service, and allow companies to enter markets where space is a premium. Larger stores have expanded nonfood selections to better compete with mass merchandisers. No-frills formats offer low prices and attract warehouse club customers.

Targeted Advertising - While total ad spending has remained at about 1% of sales, grocery stores are focusing on more targeted vehicles, such as direct mail and radio. Grocers are relying less on mass media and focusing more on targeted advertising, according to the Food Marketing Institute. More than a third of retailers surveyed have Hispanic ad campaigns. A growing number of retailers are using nontraditional media, such as third-party websites, video, blogs, social media, and text messaging.

Improved Checkout Technology - Companies are eliminating one major problem with food shopping and realizing labor cost-savings by further automating the checkout process. Many large chains have implemented self-checkout lanes. Handheld scanners and "shopping buddy" devices can track purchases as a customer shops, reducing checkout and bagging time. Other stores have invested in technology that tracks the number of shoppers in the store in order to know the right time to open new checkout lanes to accommodate customers.

Location-Based Marketing - Grocery stores are starting to use iPhone-compatible iBeacon technology to push more location-specific data to customers who choose to receive it. More than 100 Safeway and Giant Eagle locations in the US had iBeacons activated by location-based advertising firm InMarket in 2014. Customers receive relevant in-store coupons and shopping list reminders when they are 100 feet of a beacon. Tesco and Waitrose, two of the UK's largest supermarkets, started trials of iBeacon in 2014.

Industry Opportunities

Focus on Health, Wellness - Companies can leverage increased consumer interest in health and wellness by improving and expanding perishable and organic merchandise departments and offering health-related services. By promoting healthy foods, grocery stores can act as a resource for customers looking to eat better. Some companies are expanding into the wellness arena, developing relationships with hospitals and nutritionists, and offering in-store clinics.

Prepared Foods - Grocery stores can offer consumers added convenience and better compete with restaurants by offering high-quality prepared foods. Companies may provide ready-to-eat products through hot service counters; self-service refrigerated cases; sandwich, soup, or salad bars; or sushi stations. A growing number of retailers are providing a quick-stop area with dinner options. Companies may also lease space to third-party restaurants to offer meal solutions. Deli-prepared chicken, salads, and sandwiches are the most popular prepared foods.

Loyalty Programs - In the competitive food retailing industry, loyalty programs can help companies develop a solid customer base. About 80% of US households belong to a loyalty card program, according to the Food Marketing Institute. Loyalty cardholders tend to visit stores more frequently and deliver higher gross margins. Common rewards include automatic electronic coupon deduction, points toward a discount or free product, and donations to charities. A small number of companies use loyalty card information to help notify customers about food safety incidents.

Nonfood Sales - To reclaim food dollars from competitors, grocery stores can add services and sell high-traffic nonfood items. Retail gas sales drive traffic and provide strong incentives for reward programs. A growing number of retailers are adding pharmacies, banks, and dry cleaners.

Private Label Growth - Grocery stores have built strong house brands in recent years, which drive greater profit to the company and lower prices to consumers. Some supermarkets have a multi-tiered approach to private labels to reach different audiences. For example, Safeway has premium and core private label products, as well as health and wellness brands such as O Organics, Eating Right, and Bright Green.

Supermarket Food Delivery - Stores are adding e-grocery options for shoppers, a trend that has accelerated following Amazon's purchase of Whole Foods Market. Home delivery of items ordered online and in-store pick up of online orders are growing in popularity. Click and collect programs allow customers to place their orders online and collect the groceries at a scheduled time from the supermarket. Many European markets have already adopted the click and collect method, with collection spots not only at stores but also at places such as subway stations. Amazon in 2018 began offering free two-hour delivery of Whole Foods groceries to members of its Prime program in some 30 metro areas in the US.

Copyright 2019, Hoover's Inc., All Rights Reserved. This data cannot be copied, sold, or distributed in any manner without the written permission of First Research.

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