May 9, 2007
FMI Assesses State of the Grocery Industry
The Food Marketing Institute (FMI) released its Food Retailing Industry Speaks: Annual State of the Industry Review 2007 and the news was the best it has been in years as total sales grew 5.3 percent last year while same-store numbers were up four percent.
Business was particularly good for large national chains, which reported strong sales and profit numbers. On the flip side, many smaller chains and independents found some tough going in 2006. FMI reported that nearly one in four grocers (23.5 percent) saw a decline in same-store revenues and the number was even more pronounced (47.1 percent) when inflation was factored in.
“These results are impressive in view of all the rising costs the industry must bear, including energy, healthcare, credit card interchange fees and the imperative to keep improving products and services in today’s extraordinarily competitive marketplace,” said FMI senior vice president Michael Sansolo. “However, it is also clear that many retailers are struggling to solve the puzzle of cutting costs as much as possible while continually improving customer service.”
Working in an increasingly competitive climate, grocers of all sizes are looking for ways to differentiate and find sustainable niches from which to operate. Perhaps not surprisingly are numbers that show virtually all grocers are following the same path to being different. Just under 99 percent reported using perishables, prepared foods, deli and bakery items to stand out in a crowd. Most claim the strategy has paid dividends, rating the effectiveness of company initiatives an 8.6 on a scale of 10 with 10 being the highest score.
Ethnic foods are common in most markets today with 83.9 percent offering these items. Organics are fairly widespread also with 72.4 percent of operators offering a natural/organic food aisle or section. Forty-six percent reported having developing store organics to meet the demand for these items.
Among the top challenges faced by supermarket operators are:
- Healthcare costs
- Credit/debit card interchange fees
- Energy costs
- Staffing, hiring and employee retention
- Technology investments
- Food safety
Discussion Question: What is your assessment of the state of the grocery industry? Do you think the heavy reliance on perishables and prepared foods for differentiation will continue?
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The continued focus on differentiation in perishables will not slow down or change. Groups like Wal-Mart and Target can sell paper towels and Miracle Whip for a cheaper price. But when it comes to perishables, they still have to figure out the perishables game (mind you, don’t underestimate them). A head of lettuce or a solution filled select steak only takes one purchase to figure out that it just doesn’t live up to expectations. Retailers need to focus on “true customer needs and wants.” The focus needs to remain on the customer, otherwise all is lost. We all talk a good talk on quality and customer service, but at what price? When Aunt Jemima Pancake mix is 50 cents cheaper at Wal-Mart every day compared to most retail chains, tell me what is the difference? My wife and I find that we save 80-90 dollars every trip to Wal-Mart (that pays for a lot of gas). But, when it comes to dairy, meat and produce, we won’t touch the Wal-Mart items because the shelf life, eating experience and flavor are just not there.
The stores that have linked cost cutting with increased efficiency have benefited most from cost cutting and will continue to do so rather than the store that cuts costs for only that quarter or year. At the same time, the successful stores are creating new solutions, selections, and groupings based on what their consumers want. Managing the paradox of creating customer oriented offerings and increasing efficiencies is not easy but it does result in lower costs and higher sales. Now that enough retailers are doing this so that results are noticeable across the industry is good news indeed.
The grocery industry is being led by retailers obsessed with low pricing at one end (Wal-Mart, Aldi, etc.) and by retailers offering value-added differentiation on the other (Wegmans, Aldi, Trader Joe’s etc.), primarily via perishable and prepared foods and/or unique new items. The former group procures well and prices low; the other emphasizes freshness and unique offerings with value-added pricing. Both groups seem to be performing well and the state of the grocery industry appears stable for now.
Strange as it may seem, the grocery industry gains potential benefits from today’s rising energy and health costs, fees, the desire for convenience and almost anything adding inflationary pressures. These occurrences force prices upward across the board and give supermarkets the opportunity to differentiate via their creative perishable presentations and prepared food assortments at higher price points–with incrementally better margins–which in turn boosts like-store sales.
The emphasis on perishables will likely continue until some deflationary metrics arise or until all supermarkets do a comparably excellent job with their perishables. I would then expect a new paradigm will be created by some innovative retailer and another paradigm will present itself in the grocery industry just as been the case in the past.
After 10 years of telling food retailers they must segment their target customers, we are starting to see some results. Before opening the bubble, look into the numbers. Back out inflation, which is higher for perishables, and the numbers are more sober. Then, factor in the increasing rates for health care and fuel, which are growing faster than inflation. Overlay an aging population which eats less. Conclusion: the industry is holding, not losing, and there is still much work to be done.
With energy prices continuing to rise and home values declining, the environment is right for grocery sales to continue to remain strong with the business–their gains being at the expense of the food-away-from home sector. Key will be for the grocery industry to use this favorable environment as their window to increase focus on being able to deliver convenience in both the shopping and preparation phases of the grocery experience.
Cost cutting and gaining operating proficiencies are the norm in the supermarket industry today. Great Atlantic and Pacific Tea is a prime example how trimming operating costs has helped to improve the bottom line.
Still retail grocers need to focus on the demands of their customers. Consumers are voting with their dollars. They want fresh food, prepared food and good food, at reasonable and fair prices. As they pay more for gasoline and other necessities, they are determined to stretch their food dollar.
They likely will shop the competition and today, that means just about everything from dollar stores to the drug store, and as inflation returns, they will likely try coupons again as a way to save money.
They will explore new formats that makes their shopping trip easier. But they will not be fooled by convenience if it means dramatically higher prices.
It is both an challenging and exciting time to be in the retail food business. Those retailers that can differentiate themselves from the crowd will gain and earn customer loyalty.
The focus on perishables will continue as long as the industry allows itself to remain obsessed with price. The mass and club channels will continue to win the “how low can we go?” battle for some center store items while the Aldis et. al. will scoop up the bottom of the market, especially in private label. Since traditional supermarkets can’t match those price points on, say canned goods or other center store items, that leaves them with essentially only one strategy–focusing on perishables. Of course, if you take price out of the equation and compete on another criteria, say service, you might be able to de-emphasize perishables a bit.
Two issues jump out from the FMI study: supermarkets are all using the same differentiation strategy and supermarkets are all suffering from increased credit card fees. “Me too” consumer strategies rarely lead to optimal results. Copying everyone else isn’t differentiation. The credit card fee issue is the reverse: by negotiating as a group working together, using industry organizations like Retex, supermarkets have the opportunity to reduce their costs. It pays to work in tandem on the supplier side not on the consumer side.
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The continued focus on differentiation in perishables will not slow down or change. Groups like Wal-Mart and Target can sell paper towels and Miracle Whip for a cheaper price. But when it comes to perishables, they still have to figure out the perishables game (mind you, don’t underestimate them). A head of lettuce or a solution filled select steak only takes one purchase to figure out that it just doesn’t live up to expectations. Retailers need to focus on “true customer needs and wants.” The focus needs to remain on the customer, otherwise all is lost. We all talk a good talk on quality and customer service, but at what price? When Aunt Jemima Pancake mix is 50 cents cheaper at Wal-Mart every day compared to most retail chains, tell me what is the difference? My wife and I find that we save 80-90 dollars every trip to Wal-Mart (that pays for a lot of gas). But, when it comes to dairy, meat and produce, we won’t touch the Wal-Mart items because the shelf life, eating experience and flavor are just not there.
The stores that have linked cost cutting with increased efficiency have benefited most from cost cutting and will continue to do so rather than the store that cuts costs for only that quarter or year. At the same time, the successful stores are creating new solutions, selections, and groupings based on what their consumers want. Managing the paradox of creating customer oriented offerings and increasing efficiencies is not easy but it does result in lower costs and higher sales. Now that enough retailers are doing this so that results are noticeable across the industry is good news indeed.
The grocery industry is being led by retailers obsessed with low pricing at one end (Wal-Mart, Aldi, etc.) and by retailers offering value-added differentiation on the other (Wegmans, Aldi, Trader Joe’s etc.), primarily via perishable and prepared foods and/or unique new items. The former group procures well and prices low; the other emphasizes freshness and unique offerings with value-added pricing. Both groups seem to be performing well and the state of the grocery industry appears stable for now.
Strange as it may seem, the grocery industry gains potential benefits from today’s rising energy and health costs, fees, the desire for convenience and almost anything adding inflationary pressures. These occurrences force prices upward across the board and give supermarkets the opportunity to differentiate via their creative perishable presentations and prepared food assortments at higher price points–with incrementally better margins–which in turn boosts like-store sales.
The emphasis on perishables will likely continue until some deflationary metrics arise or until all supermarkets do a comparably excellent job with their perishables. I would then expect a new paradigm will be created by some innovative retailer and another paradigm will present itself in the grocery industry just as been the case in the past.
After 10 years of telling food retailers they must segment their target customers, we are starting to see some results. Before opening the bubble, look into the numbers. Back out inflation, which is higher for perishables, and the numbers are more sober. Then, factor in the increasing rates for health care and fuel, which are growing faster than inflation. Overlay an aging population which eats less. Conclusion: the industry is holding, not losing, and there is still much work to be done.
With energy prices continuing to rise and home values declining, the environment is right for grocery sales to continue to remain strong with the business–their gains being at the expense of the food-away-from home sector. Key will be for the grocery industry to use this favorable environment as their window to increase focus on being able to deliver convenience in both the shopping and preparation phases of the grocery experience.
Cost cutting and gaining operating proficiencies are the norm in the supermarket industry today. Great Atlantic and Pacific Tea is a prime example how trimming operating costs has helped to improve the bottom line.
Still retail grocers need to focus on the demands of their customers. Consumers are voting with their dollars. They want fresh food, prepared food and good food, at reasonable and fair prices. As they pay more for gasoline and other necessities, they are determined to stretch their food dollar.
They likely will shop the competition and today, that means just about everything from dollar stores to the drug store, and as inflation returns, they will likely try coupons again as a way to save money.
They will explore new formats that makes their shopping trip easier. But they will not be fooled by convenience if it means dramatically higher prices.
It is both an challenging and exciting time to be in the retail food business. Those retailers that can differentiate themselves from the crowd will gain and earn customer loyalty.
The focus on perishables will continue as long as the industry allows itself to remain obsessed with price. The mass and club channels will continue to win the “how low can we go?” battle for some center store items while the Aldis et. al. will scoop up the bottom of the market, especially in private label. Since traditional supermarkets can’t match those price points on, say canned goods or other center store items, that leaves them with essentially only one strategy–focusing on perishables. Of course, if you take price out of the equation and compete on another criteria, say service, you might be able to de-emphasize perishables a bit.
Two issues jump out from the FMI study: supermarkets are all using the same differentiation strategy and supermarkets are all suffering from increased credit card fees. “Me too” consumer strategies rarely lead to optimal results. Copying everyone else isn’t differentiation. The credit card fee issue is the reverse: by negotiating as a group working together, using industry organizations like Retex, supermarkets have the opportunity to reduce their costs. It pays to work in tandem on the supplier side not on the consumer side.