Keith Daniels, Partner, shared his insights with Middle Market Growth on how pressure on cost and logistics, increasing competition, and advances in technology are driving consolidation in the grocery industry.
The last few years have been difficult for grocery store chains. The industry has been through a great deal of distress and consolidation, and industry observers expect to see more of the same in the months and years ahead. There are several trends driving the market shift, including pressure on cost and logistics, increasing competition, lack of liquidity needed to keep stores attractive to consumers, and changing consumer shopping habits sparked by advanced technology. Here’s a closer look at some of these trends.
Pressure on cost and logistics. Many midsize grocers are open to being acquired in order to stay competitive and relevant to consumers. In a profit-challenged market, most grocers are under tremendous pressure on cost and logistics. On one side, stores are being squeezed by the rising costs of labor, manufacturing and suppliers. At the same time, many companies face logistics challenges, such as how to offer speedy delivery service without driving up the costs of the products too much.
Competition. The competition among grocers for wallet share is fierce. In response, many retailers are striving to lower prices and improve convenience for customers. Walmart, the largest U.S. grocery retailer, has focused on rolling out in-person pickup for online orders at different stores. It is also looking to leverage Jet.com, the e-commerce platform it acquired in 2016. Earlier this year, Target announced plans to expand its curbside pickup service, Drive Up, nationwide. Aldi, meanwhile, is expanding its market share in the low-cost grocery space by avoiding brand names and operating out of smaller stores. And Germany’s Lidl is trying to break into the U.S. market by offering cheaper prices.
Nontraditional grocers, such as drug stores and dollar stores, are getting in the game, too, by stocking grocery items to drive foot traffic in hopes of selling more profitable offerings like beauty, health and personal care products. Given the level of competition, many stores that rely on low prices will exhaust their ability to cut further and will need to consider additional services and processes in order to stay competitive.
Advances in technology. Technology has transformed the grocery industry in myriad ways. Google and Amazon, for instance, now make it possible to order groceries just by reading a shopping list out loud. Grocers throughout the industry must keep pace technologically to meet the needs of millennials, who consider convenience one of the most important factors when deciding where they want to shop. There are some retailers that successfully innovate and stay ahead of the trends. But many companies have not been able to sufficiently invest in new technology and e-commerce platforms, which help stave off the competition.
All of these trends are contributing to the mounting pressures on traditional grocery stores and, in some cases, forcing them to shutter. With that in mind, here are a few notable trends regarding consolidation and other changes throughout the industry.
Big players vs. medium-sized players. Companies such as Kroger, Albertsons and other major grocers believe they can achieve more bottom-line growth by consolidating, which can lower costs and increase operational margins. These companies will continue to look for regional or specialty stores that can help them expand their footprint and increase their customer base. They’re aided by a lending environment that makes it easier for the big players with better balance sheets to obtain financing. Small and medium-sized players are going to continue to feel the most pressure and in many cases are going to need to merge or be acquired in order to achieve scale and survive.
Specialty groceries. Ethnic food-oriented stores are one niche of the grocery space that is experiencing growth. Additionally, the industry continues to embrace health and well-being. Millennials in particular are leading the charge for eating healthier and are demanding more organic products. Specialty stores are capitalizing on consumer preferences and taking market share from traditional grocery stores, putting additional pressure on sales and profits.
Online grocery. E-commerce platforms are gaining traction because of the convenience they offer and the ongoing shift in consumers’ shopping habits. According to a Nielsen study, by 2020 consumers could spend $100 billion on groceries online. While consumers have been slow to adopt online shopping for groceries due to the perishable nature of many food items, same-day delivery services will help assuage such concerns and increase consumer confidence about purchasing all kinds of groceries online. As online ordering becomes the norm, it will put additional pressure on traditional brick-and-mortar stores to stay profitable.
This article originally published in Middle Market Growth.