The grocery industry, one of the most competitive and market reactive in the retail sector, is at critical moment. Pandemic shopping habits changed dramatically by force, and operators had to pivot and adapt quickly as customers curtailed trips to the grocery store in favor of online shopping and delivery.
Revenues rose as much as 35% from the previous year as home-cooked meals, stress baking and panic buying ensued during 2020. The coronavirus elevated fiscal sales by $4.6 billion. As events unfolded,
e-commerce platforms, store operations and supply chain logistics were figured out in real-time. Profit margins in the grocery industry have always been thin because of intense competition, and operators often sought promotions to entice customers into their stores. Industry analysts are wondering if consumer habits, developed out of necessity, will carry forward as we move past the pandemic era. Will we stay glued to our phone apps and Instacart? Or will the visceral experience, and possibility to pick our own fruits and veggies, entice us back into the grocery aisle?
Doug Munson is the founding Principal at MTN Retail Advisors, a national primary grocery retail research and data collection firm that works with major grocers to help retailers, developers and investors determine the best locations for grocery stores.
Munson says, “I do see a demarcation between publicly-traded and privately-owned grocery companies and their business focus. The large publicly traded grocers are investing heavily in eCommerce and online fulfilment to support that segment, which averages 8-10% of total store sales. To that point, the physical store is not going away. There are approximately 8,000 exclusively-online retailers looking to establish brick and mortar locations.”
Moving toward a period of normalcy, leading chains will need to reinvent themselves in order to preserve and sustain additional sales they achieved from the pandemic. Other headwinds include the inflationary environment, supply chain hiccups and a constricted labor market exacerbated by the “Great Resignation.” Munson sees the latter as a pain point that is not going away any time soon.
“Grocery is essential to the economy, as we quickly realized during the pandemic. While supply chain disruptions have eased somewhat as we move away from the crisis, we still face considerable challenges in hiring. The labor market is very tight, and grocers are having a tough time finding employees. I feel this will continue to be an issue for retailers for some time to come.”
Munson feels that grocers need to focus on delivering one or more of the following attributes to their customers to maintain the edge in a growing field of competitors:
- Value and Price Proposition: Shoppers are increasingly brand loyal toward trusted private labels, such as Kroger’s Simple Truth® Organic. Private label brands, for the fourth consecutive year, gained in popularity as consumers look for less expensive alternatives. This segment is expected to maintain growth momentum.
- A Unique & Elevated Experience: Rochester, NY-based Wegmans anchored its business on the customer’s experience and involvement in the local community. The northeast chain frequently ranks at the top for best customer experience. Customers enjoy a distinctive shopping setting where they can see, and smell foods being cooked and baked.
- Convenience & Technology: Stemming from a desire to move customers quickly through the shopping journey to limit virus exposure, grocers are increasingly delivering a frictionless experience to customers—while balancing the need to stay engaged. QR codes, inventory management technology and automated entry/exit gates will become an integral part of the in-store environment.
Retail Trends and Technology
Store-within-a-store concepts will continue to emerge as large grocers strike deals with retailers in alternative categories to create new segments of merchandise under their roof. Consumer brands in popular categories such as clothes and household goods will create interest, differentiation, and expand margins.
Kansas City-based Ball’s Food Store has introduced a CBD store-within-a-store in its Price Chopper supermarket through a partnership with American Shaman, a provider of high quality CBD tinctures and beverages. The store environment features botanical prints, a small seating area to test products and consult with brand representatives, and wood-toned finishes to reflect the brand’s focus on natural ingredients.
Amazon Fresh, who currently has 19 stores across six states and Washington, D.C., according to their website, was one of the first small-format grocers to introduce this technology to consumers. The grocery chain’s deep-pocketed parent absorbed the considerable R & D technology costs as a loss leader. Wood notes, “It will be interesting to see how many companies can buy this technology in the future.”
Advances in the fulfilment center are improving efficiencies, managing inventory, costs and reducing waste and energy-use. The need for large warehouses and smaller, localized-sites to create micro-fulfillment centers, has transformed the industrial sector into the reddest hot and most active in commercial real estate. Ocado Group, a U.K-based online grocer, builds automated customer fulfilment centers (CFCs) using sophisticated AI-powered, demand-forecasting engines, high-speed picking bots and a 3D grid of crates packed with items. The company has partnered with Kroger, the largest U.S. grocery chain, to build several automated giant CFCs to meet the demand for online grocery. Ocado’s solution, the Ocado Smart Platform (OSP), offers grocers an end-to-end e-commerce, fulfilment and logistics platform.
Kroger’s e-Commerce online delivery earnings outperformed during the pandemic. The company will dedicate significant resources to accelerate e-Commerce under its strategic growth plan. The company’s 2020 fiscal sales were $132.5 billion. Digital sales increased 103% on a two-year stack basis and store sales grew 14.1%. While online grocery seems to be waning somewhat as we emerge from the pandemic, the company believes strongly in the future of e-commerce. Currently operating 45 warehouses, their partnership with Ocado will result in 20 super warehouses. The first of these debuted mid-April 2021 in Monroe, Ohio. The $55 million, 375,000-square-foot facility contains over 1,000 robots alongside 400 human employees to pick, sort and move items controlled by a proprietary air-traffic control system to fulfil customer’s orders. Algorithms regulate the pick-and-sort process and robots pack groceries intelligently, balancing bag weight to reduce plastic use and waste. The center is forecast to process as much as $700 million in sales annually, equivalent to 20 brick-and-mortar stores. Ocado’s 2021 Q4 earnings call revealed an advanced 600 series pick and pack bot that has half of its parts HP 3D printed. Touted as a ‘game-changer” the new series is five times lighter than its predecessor, energy efficient, quicker and less expensive to build. Warehouse grids will be built lighter, more portable and adaptable to fit in many different-sized buildings. The chill equipment will consume less energy and lower construction costs.
Omnichannel Retail Strategies
Omnichannel retailing enables consumers to interact with brands through both online and offline channels, enjoying a unified experience. Grocers are incorporating this strategy to allow shoppers to order online and pick up at the store, providing choice and flexibility. Shopping habits may be permanently changed, considering the popularity of OGP (Online Grocery Pickup) and BOPIS (Buy Online Pickup In Store). During the pandemic almost half of the top 500 retailers with brick-and-mortar operations were offering BOPIS, a rise from less than 7% pre-pandemic, according to a Digital Commerce 360 survey taken August 2020. Amazon at Whole Foods, Walmart and Kroger offers a BOPIS option to customers.
Pandemic-driven services like curbside pickup and same-day delivery are expensive for retailers to operate and eat into profitability. The BOPIS model helps offset delivery expenses and benefits grocers as it gets consumers into the store—reducing online cart abandonment and capturing brand loyalty.
Major markets have begun to roll out omnichannel grocery store prototypes that function as both a physical store and online fulfilment center. Workers pick OGP and BOPIS merchandise from existing store shelves and not a warehouse as with online home delivery. Workers quickly pick items with hand-held inventory guns identified by wayfaring signage. Inventory is restocked speedily by moving merchandise from the back-end fulfilment area to the sales floor, allowing consumers to get their essentials faster.
Grocers are partnering with nonprofit and government entities to meet the needs of “food deserts.” A food desert, or healthy food priority area, has limited access to affordable and nutritious food. The USDA’s Economic Research Service previously identified more than 6,500 food census tracts in the United States based on 2000 and 2006 census data. This equates to approximately 13.5 million people with low access to sources of healthful food. In early 2021, H. R. 1313 (Healthy Food Access for All Americans Act) was introduced to stimulate investment and healthy nutrition options in these communities.
However, the most viable and agile solutions seem to be emerging from grass-roots organizers, civic leaders and business partnerships. For example, when Buy For Less, suddenly shut its doors in northeast Oklahoma City in 2019, its primarily black community lost its only full grocery option. Working closely with community nonprofit, RestoreOKC, Homeland Stores was able to open a 6,800-square-foot grocery store in April 2021. It is about one-third of the size of an average store, and will sell a seasonal supply of fruits and vegetables grown at the nearby RestoreOKC urban farm by local middle and high school student interns. Corporate suppliers with food assistance programs can sell grocery items with deep discounts to the store. This particular Homeland Store will provide an invaluable resource to the community, and include nutrition, cooking and shopping classes.
Consumers and competition is forming the reality of the grocery landscape as we move into what’s next. Technology will continue to play a major role in shaping every aspect of the industry, however the demise of physical stores is largely overblown. The U.S. Department of Commerce census bureau news reports that while 2021 e-commerce sales did increase 14.2 percent year-over-year, it still accounts for 13.2 percent of total retail sales. There is a sense that consumers like the convenience of their phone apps, but also are beginning to welcome the communal experience of shopping after a long and isolating pandemic. Chains and independents will have to willingly embrace innovation, as different choices, challenges and opportunities present themselves.