Industry Deep Dive: Grocery Stores

Amid controversial acquisitions, volatile agricultural prices and fad food crazes, the $611.9 billion Supermarkets and Grocery Stores industry has remained one of the largest and most visible industries in the United States. Despite rapidly changing market conditions, the industry is characterized by slow growth and low profit margins. Although the industry is sluggish as a whole, some stores are outperforming others. Additionally, like the majority of industries in the retail sector, the Supermarkets and Grocery Stores industry has experienced competition from the Warehouse Clubs and Supercenters industry and the gradual shift toward e-commerce.

State of the industry

The food retail market is a tough business to expand in, let alone enter. Due to slow revenue growth and low profit margins, many stores have had to cut back on the number of locations, leading to a 0.1% annualized decline in industry establishments over the past five years. Limited assortment stores like Aldi and Trader Joes, however, have rapidly expanded store counts due to their growing popularity among consumers. These stores are typically smaller than traditional grocery stores and offer almost exclusively private label items, which are priced lower than national-level, branded goods. Whole Foods, often dubbed “Whole Paycheck”, has also entered the limited assortment space by launching the 365 by Whole Foods store concept in 2016, which exclusively sells the company’s private label goods. Additionally, in June 2017, German limited assortment grocery chain Lidl opened its first US locations, with plans to expand to over 100 stores by 2018.

While Whole Foods’ strategy to compete with limited assortment operators was to join them, traditional grocers have tried to gain market share through a variety of other methods. The most prominent strategies have been mergers and acquisitions, store revamps and the implementation of omnichannel operations. For example, Kroger and Albertsons have struggled to go organic, making numerous acquisitions during the five-year period. In 2015, Albertsons completed the $9.4 billion acquisition of Safeway, making the company the second-largest industry player. Conversely, industry leader Kroger has acquired numerous regional and specialty stores, including Roundy’s, Harris Teeter and Murray’s Cheese. In addition to these acquisitions, many of the largest industry players have invested heavily into store renovations. Aside from just aesthetic enhancements, these stores have added amenities such as hot food buffets, bakeries, delis, juice bars, coffee shops and wine and beer bars. The main purpose of these investments is to drive customers into stores by elevating a standard trip to the grocery store into a shopping experience. While these stores will struggle to draw budget buyers away from limited-assortment stores due to price, they will primarily compete for the experience- or convenience-seeking buyer.

E-commerce shakes things up

While the Online Grocery Sales industry only accounts for 2.2% of overall grocery sales, online grocers have sizably disrupted the market. Meal kits companies such as Hello Fresh, Plated and recently public Blue Apron have surged in popularity among consumers.  Additionally, services such as Fresh Direct and AmazonFresh have penetrated the grocery market due to their ease and accessibility. Brick-and-mortar retailers both in and outside the industry have responded by adding their own online channels. Kroger and Albertsons have enhanced and expanded their online offerings to include both delivery and pickup services. Walmart, arguably the industry’s largest source of external competition, has also added the option to pick up online grocery purchases. Recently, Amazon’s acquisition of Whole Foods has further disrupted the Supermarkets and Grocery Stores industry. Not only did the acquisition bring Amazon into the brick-and-mortar space, but it will also allow the e-tailing giant to further influence the food retail market. Over the next five years, the Online Grocery Sales industry is expected to rise an annualized 6.7% to $18.6 billion; this is much faster growth than that expected for brick-and-mortar grocers.

Outlook

Over the five years to 2022, the market for both brick-and-mortar supermarkets and grocery stores and online grocery retailers is expected to become increasingly competitive. As organic growth becomes increasingly difficult to achieve, many larger companies are expected to continue engaging in merger and acquisition activity. Large companies will also continue investing in specialty and concept stores, especially as limited-assortment stores expand within the industry. Despite all these changes and improvements, the Supermarkets and Grocery Stores industry is only expected to rise at an annualized rate of 0.8% to reach $636.0 billion over the next five years.