The grocery business in the U.S. is, and always has been, a fairly miserable one. In fact, from A&P to Grand Union, Dahl's, etc., bankruptcy courts have been littered with the industry's failures for decades.
Of course the reasoning is fairly simple...razor-thin operating margins that hover around 1-3% leave the entire industry completely incapable of absorbing even the slightest financial shock from things like increasing competition or food deflation.
Unfortunately, the industry is about to undergo a series of changes that will likely lay waste to the traditional grocery store model. Here are a couple of the changes already in motion:
1. Increasing Competition From Large-Format Discount Retailers
While you would think that an oversupplied market with abysmal operating margins would be immune from massive new capacity additions, you'd be wrong. States all across the country added millions of square feet of grocery capacity in 2016.
Moreover, as Bloomberg points out today, large European discount grocery retailers, like Lidl and Aldi, are also looking to build a large presence in the U.S. market over the coming years.
An invasion is getting under way. Lidl, a German retailer known for low prices and efficient operations, is expected to start an aggressive U.S. expansion in the coming weeks that could open as many as 100 new stores across the East Coast by the summer of 2018. The company, which runs about 10,000 stores in Europe, has also set its sights on Texas, one of the most competitive grocery markets in the U.S. Analysts expect Lidl to expand to nearly $9 billion in sales by 2023.
Lidl is slated to open 20 locations in Virginia, North Carolina, and South Carolina this summer and could reach 630 locations over the next six years, according to Kantar Retail. The company had sales of roughly $69 billion last year. Expect Lidl's entrance into the U.S. to ramp up the price war and possibly force smaller, regional companies to close or consolidate. "It's definitely making the regional players nervous," said Bartashus. "It's like a stack of dominoes; it takes one thing to tip it, and they all start moving in one direction."
2. Competition Continues To Grow From Every Other Retail Format From Dollar Stores To Pharmacies
Dollar stores have been stealing share from traditional grocers for years and the pressure does not seem likely to abate anytime in the near future.
More food is sold in more places these days, with pharmacies and dollar stores looking to groceries to lure customers. Dollar General alone added more than 900 stores last year, ending 2016 with more than 13,000 locations. The chain, which generates roughly 75 percent of revenue from consumable items such as food, soap, and paper towels, is planning to open another 1,000 stores this year. CVS, which operates nearly 8,000 standalone locations, is betting on food to boost store traffic. Like other pharmacies, where shoppers would traditionally visit to pick up deodorant along with a prescription, the chain has boosted its food offerings to add more healthy snacks and grab-and-go options.
Because of their smaller footprints and labor costs per square foot that are a fraction of a traditional grocer's, dollar stores can offer consumers lower prices and still earn 3x higher margins than a regular grocery chain....all of which makes it likely that they'll continue to steal share.
3. Food Price Deflation
Meanwhile, food price deflation continues to wreak havoc on already razor-thin margins.
4. 'Smart Stores' Will Ultimately Revolutionize The Traditional Retail Grocery Market
Finally, while Amazon, and others, have yet to make meaningful progress penetrating the traditional grocery market, their success is a matter of when, not if. Concept stores, like Amazon Go, already exist that virtually eliminate the need for dozens of in-store employees which will allow them to generate higher returns at lower price points than traditional grocers. Meanwhile, other grocery concepts, like drive through pick up, are certain to take some share over the coming years as well.
And while the demise of the traditional grocery store will undoubtedly take time (recall that people were calling for the demise of Blockbuster for nearly a decade before it finally happened), make no mistake that the retail grocery market 10-15 years from now will not include many of the well-recognized companies that consumers visit weekly as of today.