Will the Internet Kill Grocery Retailers

Will the Internet Kill Grocery Retailers

March 11, 2015 0 By Aval Sethi

Supermarkets, much like department stores, mass merchandisers, supercenters, and other broad-assortment retailers are facing impacts across almost every category in their stores. Reading the commentary of equity analysts, one is impressed by the extent to which supercenters like Walmart and warehouse clubs like Costco have stolen supermarket customers and taken over categories that were previously the sole domain of supermarkets. But the assault on supermarkets is actually much more widespread, and comes not just from traditional competitors like supercenters and warehouse clubs, but also from new entrants like dollar stores and online retailers, and from shifts in consumer habits. We believe that there are several key issues that will effect a dramatic change in the supermarket industry over the next five years.

First, eCommerce will shift significant dollars out of the industry. Although home delivery does not seem to be a viable alternative in the supermarket space today, a combination of fragmentation in consumer shopping behavior and emerging alternatives to home delivery will change how Americans buy consumables. The inexorable march of internet technology will create significant changes in the expectations and behavior of supermarket shoppers that will open up opportunities for new and creative concepts. Related to this, the consumer need for convenience will continue to explode and retailers will need to find solutions that solve problems for time-starved customers. While online retail of groceries doesn’t generally have cost advantages, some segments of consumers are more than willing to pay for convenience.

Second, the bifurcation of income in the US will accelerate and lead to an even greater need for supermarkets to provide value. Supermarkets have long relied on a high-volume, low-margin model, and the large, vibrant middle class that characterized mid-twentieth-century America was essential to supermarket success. However, the supermarket sweet spot in the middle of the income distribution has been shrinking for decades. As income inequality accelerates, the ability of supermarkets to remain competitive will diminish as volume flees for Walmart or migrates to higher-end retailers like Whole Foods. Supermarkets have already reduced costs dramatically in order to compete with much more efficient competitors, and they can no longer generate price savings by cutting heads. Now too they lack the residual store-level talent to shift strategy and provide service. Consequently, these downward trends create an unstable situation for supermarket retailers.

Third, the bifurcation of consumer shopping trips will continue unabated with consumers looking for meal solutions on an almost nightly basis (trips that have been going disproportionately to Quick Serve Restaurants [QSRs]) and filling in their non-perishable needs (household items, canned goods, health and beauty care) on separate store-based trips. These non-perishable trips are a place where eCommerce and other non-traditional competitors like dollar stores will shine, and the winners of the past two decades, supercenters, will fail. This trend will continue to shrink the freedom supermarkets have to manage pricing, service, and product assortment. While beautiful perishables departments have been a cornerstone of many supermarkets’ strategies and formats, Americans have greatly simplified their meals over the past three decades, and many have either forgotten or never learned how to pull these raw ingredients into a meal. Because of this, demand for the core perishables category is declining.

This will lead to a fourth significant issue: the amount of excess space that supermarkets will have on hand. This will manifest itself not just in the number of excess stores in a chain’s network that will need to close but, more importantly, the excess space in every individual location that a chain operates. As we will show, supermarket store size has risen dramatically over the last 30 years yet consumer behavior indicates a need for this space to shrink dramatically. Space will become an albatross around the necks of most supermarket chains as they struggle to figure out how to productively deploy or shrink the space in what has become a very inflexible format.

Finally, the wave of human health concerns (especially relative to obesity) will cause supermarkets to rethink some of their core strategies.

We are currently in the midst of many of these changes, and because of them, the past two decades have been challenging for supermarket companies. The recent recession has made things worse. Store closures have become increasingly common, household names like A&P and Winn-Dixie (now part of Lone Star owned Bi-Lo) have entered (and emerged from) bankruptcy, and supermarket giant Supervalu is laying off workers, closing stores and selling assets to Cerberus Capital Management in a bid to stay afloat. Even large chains, like Safeway, have struggled with generating high returns on invested capital, and Safeway has also been purchased by Cerberus Capital Management. Kroger, for its part, has done very well and improved its operations significantly, as seen in its falling SG&A Expense Ratio. However, it is focused on improving a box and a style of retailing that, as we will see later in the chapter, may face an existential crisis if European-style, purpose-built Drive stores (small warehouse formats where customers order online and pick up orders) come to America. These Drive stores are apt examples of the “Shrink and Transform the Format” strategy.

About the author

Book extract from from Retail Revolution: Will Your Brick-and-Mortar Store Survive? – By Rajiv Lal, Jose Alvarez and Dan Greenberg