Grocery stores
continue to try to make grocerant niche Ready-2-Eat and Heat-N-Eat fresh
prepared meals and meal components into a CPG product. That according to Steven Johnson, Grocerant
Guru® at Tacoma, WA based Foodservice Solutions® has greatly contributed to the
grocery sectors continued capitulation of consumer market share, share of
stomach and share of Dollars.
Regular readers
of this blog understand consumers flight from legacy grocery retailers to new
non-traditional points of distribution including, companies the ilk of Ikea, Costco,
Walgreens, and branded restaurants
from every sector of the restaurant sector.
In fact, Scott Moses is a
Managing Director and Head of Grocery, Pharmacy & Restaurants Investment
Banking at PJ Solomon, wrote;
“There are now 26,000 traditional supermarkets in the United States, roughly
900 fewer than 10 years ago. Regional supermarkets have been slowly eclipsed by
the shadow of various extremely large, well-capitalized (investment-grade),
non-union and fast-growing alternative grocers.”
(Johnson notes: Doing the same
thing over and over again only gets you the same results those results can be
found in New Non-traditional points of fresh food distribution).
Moses continued saying
“alternative grocers now comprise meaningfully more grocery sales than
traditional supermarkets and are the primary grocery shopping outlet for 61% of
customers, up from 19% roughly 20 years ago. The average consumer now shops for
groceries every week at five banners, in four different grocery channels (e.g.,
supermarkets, supercenters, drugstores, discount/dollar grocers, club stores
and various specialty grocers), according to FMI.
(Johnson reminds readers of
this blog that talk out meals and meal components from restaurants has grown
from 3.6% in 1991 to record highs and are expected to remain at about 28% of
sales overall for the next three years.)
Take note of this from Moses: “There are over
65,000 alternative grocers in the United States, many of which were not grocery
competitors a generation ago, including: ~6,000 supercenters (Walmart, Target
and Meijer); ~1,400 clubs (Costco, Sam's and BJs); ~33,000 dollar grocers
(that’s just Dollar General and Dollar Tree/Family Dollar); ~21,000 drugstores
(that’s just Walgreens, CVS and Rite Aid);
~4,000 discounters (Germany’s Aldi and
Trader Joe’s, Grocery Outlet, Save-A-Lot and, more recently, Germany’s Lidl);~1,000 natural and farmers
markets (Whole Foods, Sprouts and Natural Grocers) as well as many Latino,
Asian and other specialty grocers.”
Regular readers of this blog know that
consumers are dynamic not static. Here
is how Moses points that out. “Walmart is widely known as America’s leading
grocer, with roughly 25% national market share, with over 50% market share in
over 200 markets (according to ILSR) and as much U.S. grocery sales as Kroger
(#2), Albertsons (#4) and Ahold Delhaize (#5) combined. However, many people do
not appreciate that most of the country’s Top 10 grocers are not
traditional supermarkets. Costco is ranked #3, Amazon/Whole Foods is #6
(and growing rapidly), Target is ranked #7, CVS is ranked #9 and Dollar General
is ranked #10. This has significant competitive implications.
(Johnson says, talk about stuck in the
middle, legacy grocery stores that continue to try and make grocerant niche
Ready-2-Eat and Heat-N-Eat fresh prepared meals and meal components into CPG
products will continues to capitulate customers.)
Let’s continue with Moses. “The average
U.S. Costco (ranked #3) generates roughly $242mm in revenue, roughly 56% of
which are the same groceries sold in supermarkets, just in larger pack sizes.
That's $135mm of groceries per store, or $2.5mm in weekly grocery sales, which
is three times an exceptional traditional supermarket and six times
the average.”…
“The vast majority of sales at Dollar
General (#10) and Family Dollar / Dollar Tree (#12) stores are the same
groceries sold in supermarkets, just in smaller pack sizes. As a result, these
chains have a $41bn combined estimated grocery business, which together would
be ranked #9. Dollar General plans to add over 1,000 new stores this year and
eventually double its store-base from over 17,000 to over 34,000 stores.
Walgreens, CVS and Rite Aid have a $40 billion combined estimated grocery
business.”
(Regular readers of this blog know about
the growth of fresh foods at Dollar General and Dollar Tree. They know that there is no legacy grocery
store chain that is growing at a rate of 350 new stores per year, let alone 500
or 1,000. Do you wonder why? The team at
Foodservice Solutions® does not wonder why.)
Moses knows why as well; “Walmart,
Target, Costco, Aldi, Dollar General and Dollar Tree/Family Dollar have been
driving their grocery market share for years with lower prices and significant
operational investments, which have been facilitated by scale efficiencies,
including lower cost of goods. This has, in turn, forced traditional grocers to
lower their prices in order to retain some share of the average household’s
various weekly grocery trips. While the largest traditional grocers can endure
some price investment, the vast majority of smaller regional supermarkets lost
a significant percentage of their annual EBITDA in the few years before COVID
trying to keep up. This decline meaningfully impacted these grocers’ ability to
match their larger peers’ operational investments and continue to operate
profitably, particularly as labor and technology costs have increased. This led
to numerous grocery bankruptcies, including A&P (once the country’s largest
grocer, with over 15,000 stores), Bashas’, Bruno’s / BI-LO, C&K Market,
Haggen, Central Grocers / Strack & Van Til, Earth Fare, Fairway, Kings
Balducci’s and Marsh Supermarkets, among others.”….
“The key driver of this tsunami of
alternative grocery competition is the strong correlation between scale and
credit rating. Larger companies, statistically, have a better rating and a
lower cost of debt, enabling them to make larger investments in price, wages,
marketing, technology and growth to acquire and retain customers. Walmart
generates over $560 billion in annual sales and has an AA credit rating; its
10-year notes yield under 2%. Traditional grocers’ debt is generally much more
expensive, particularly for smaller regional operators.”
(Here is where regular readers of this
blog will just have some fun reading.)
Moses continued, “Amazon is in a whole
other league. It not only has an AA- credit rating, with 10-year notes yielding
under 2%, but it has a market valuation over $1.6 trillion, which
is far more than all publicly traded traditional and alternative grocers, combined.
Its very low cost of capital and extremely high equity valuation give it a
near-limitless ability to invest in its transformational Prime ecosystem that
competes with all grocers, particularly supermarkets.
The effect of these investments is
cumulative and geometric. Amazon has 200 million Prime subscribers, whose
membership generates $24 billion in cash (before they sell anything). When
Amazon spends $1 billion per quarter on next-day delivery, it only costs them 6
basis points of their market value (that’s 0.06%). It may be profitable, it may
not be; it barely moves the cost needle for them but meaningfully changes the
game and raises the bar — and the costs of customer acquisition and retention —
for everyone else. Amazon’s $8 billion MGM acquisition costs ~0.51% of its
value, but Prime Video will be far more attractive for subscribers, who buy
more goods from Amazon. They’ve quietly built an enormous network of
fulfillment centers and have a $20+ billion annual R&D budget that only
costs ~1.2% of its value.
Amazon’s relentless culture of “living in
the future” drives them to experiment, iterate, learn, enhance and disrupt.
Jeff Bezos has said he wants it to be “irresponsible not to have Prime”; these
investments, driven by Amazon’s low cost of capital, help effectuate that bold
vision. As a result, Amazon’s EBITDA has increased over $18 billion in
the past year alone, to over $55 billion. By comparison, Walmart’s
EBITDA is $36 billion; Costco’s EBITDA is $8 billion, i.e., Amazon’s
one-year EBITDA increase is half of Walmart’s total EBITDA and twice Costco’s (and
they both have grown their EBITDA significantly in the past year).
Amazon’s grocery investments are causing
Walmart and Target to make extraordinary investments in their own online
grocery operations. Like Amazon (with Whole Foods supporting its fresh
branding), Walmart can ship food next-day to most of the country. Target’s
online grocery operation has soared since acquiring Shipt.
Notably, according to Coresight, 68% of
U.S. internet users who bought groceries online have purchased from Amazon; 65%
purchased from Walmart; 28% purchased from Target; 17% purchased from Costco.
Aldi, Family Dollar, CVS, Walgreens and Rite Aid all use the same Instacart
marketplace platform as dozens of regional grocers.
These dynamics are particularly important
given online grocery doubled in 2020 to over 10% of total U.S. grocery sales
and is projected to more than double again by 2025 to $250 billion, or 22% of
sales.
These sales are all coming from somewhere
— mostly from supermarkets. In the long run, it is hard to see how this trend
reverses absent more traditional supermarkets building the scale they need to
afford similar investments.
(Regular readers of this blog now that
today there are 28.3 restaurants for every legacy grocery stores all of those
restaurants are selling meals and meal components to takeout and takeaway. Let
me ask you this just one more time. Is
you business plan dynamic or static? Are
you looking a customer ahead? Who are
you selling food too and just where and how are they eating it?)
Moses finishes up this
way; “While we unfortunately live in a surreal time when shameless people often
try to undermine reality with “alternative facts” (which are really just lies),
basic empirical economic data should not be controversial. The growing impact
of alternative grocers on traditional supermarkets and the broader grocery
competitive landscape is undeniable. This fact should be carefully considered
by industry operators and observers alike when developing strategic plans and
drawing important conclusions about the grocery sector and its competitive
dynamics.”
Invite Foodservice
Solutions® to complete a Grocerant ScoreCard, or for product positioning or
placement assistance, or call our Grocerant Guru®. Since 1991 Foodservice Solutions® of Tacoma, WA has been the global leader in the
Grocerant niche. Contact: Steve@FoodserviceSolutions.us or 253-759-7869
Can you Win in a Battle for
Share of Stomach?
