The retail apocalypse is coming for grocery stores



Grocery
stores are in danger.

Thomson
Reuters


  • Retail space devoted to food sales in the US has hit a
    record high.
  • New store growth is outweighing demand, and grocers are
    cutting prices to compete. 
  • Department stores followed the same strategy in the
    last decade, and now they are closing stores and filing for
    bankruptcy at staggering rates.

Department stores and many mall-based retailers are closing
thousands of stores after years of over-expansion
. Now the
grocery industry appears to be heading toward a similar fate.

Like mall-based retailers did in the 1990s, supermarkets have
been expanding rapidly across the US in recent years.

“Over the past 10 years, we saw high growth from some of the more
traditional players, which has resulted in saturation in the US,
and forced mainstream supermarkets to slow openings,” Danielle
Dolinsky, an analyst at retail consulting firm Planet Retail RNG,
told Business Insider.

For some companies, however, the pace of growth is only
accelerating.

Discount grocers including Aldi, Lidl, and Dollar General are
collectively planning to open thousands of new stores over the
next couple years.

At the same time, tech companies like Amazon — with its recent
acquisition of Whole Foods — are also entering the food wars.

Competition is ramping up at a time when the amount of retail
space devoted to food sales in the US has already hit a record
high.

The US has 4.15 square feet of retail food space per person,
which is nearly 30 times higher than in 1950, according to CoStar
Group data cited by the
Wall Street Journal
.

But demand hasn’t kept up with unit growth.

Total US grocery sales fell nearly 2% in the 12-week period
ending July 15, compared to last year, according to Nielsen data.
US grocery marketThe US food retail market
is highly fragmented.
UBS

Grocery stores have been slashing prices to drive sales and
better compete, which is driving profits lower in a business
that’s already pressured by razor-thin margins.

Whole Foods’ same-store sales have been falling for the last two
years. Even long-dominant companies like Kroger, the largest
supermarket chain in the US, are taking a hit.

Kroger’s impressive 13-year streak of quarterly same-store sales
increases ended earlier this year. That metric has now dropped
for the last two consecutive quarters.

Kroger blamed the declines on food price deflation.

It’s also facing growing price competition from Aldi, Dollar
General, Lidl, Walmart, and others.

A 2014 price study found that
Aldi’s prices were about 22% cheaper
than Kroger’s. Aldi has
more than 1,600 stores in the US with plans to open another 600
within the next couple of years.


Lidl   67 of 71
The German grocery chain
Lidl is planning a massive expansion in the
US.

Business Insider/Hayley
Peterson


Walmart is also investing in its grocery department. The company
has been expanding its click-and-collect program that allows
customers to order groceries online, then pick them up at stores.
Walmart also
reduced prices on hundreds of grocery products
last year and
recently launched a grocery price-comparison test in 1,200 stores
in an effort to edge out Aldi.

Business Insider compared prices at both chains in 2015 and found
that Walmart was about
30% more expensive than Aldi.

Now, there’s even more pressure to lower grocery prices with
newcomer Lidl entering the US market.

Lidl, which has more than 10,000 stores globally, just launched
its first US stores in June and plans to have
100 stores operating along the East Coast
by mid-2018.


Dollar General
Dollar General is opening
1,000 stores this year.

Business
Insider/Hayley Peterson


Grocers near the new Lidl stores have already started dropping
prices to better compete, according to a recent price check by
Jefferies analysts in several Southeastern markets.

The Dollar General store in Roebuck, South Carolina dropped
prices by 10% to 30% in response to Lidl entering the market,
analysts said. Food Lion has also cut prices in markets where it
competes directly with Lidl. The company sent executives to
Lidl’s stores in other countries ahead of its US launch to better
understand the concept.

History is repeating itself

Department stores and many mall-based retailers started engaging
in a
similarly aggressive price war
during the recession following
years of over-expansion, and most never recovered. Shoppers grew
accustomed to the constant discounts and stopped shopping
full-price. Now, these retailers are closing
stores
, shedding jobs, and filing for bankruptcy at
staggering rates.

Grocery stores could be heading down the same path. But they have
one major advantage over department stores: e-commerce is less of
a threat.

Shoppers have been slow to migrate online for their grocery
shopping needs. Food accounts for less than 1% of total online
sales in the US, according to a recent Goldman Sachs report.

The supermarkets that survive and thrive over the next decade
will have to find ways to shave operating costs — primarily
through the use of smart technology that strengthens inventory
management and robots that improve the customer experience — and
funnel those savings into ongoing price cuts.

Companies like Kroger and Walmart are already investing in these
technologies. But many others are “unwilling, or unable, to
engage,” Goldman Sachs analysts wrote in a research note
published Wednesday.

It’s not yet clear who the winners will be as the grocery wars
shake out, but there’s little doubt that consumers will benefit
as chains are forced to continue dropping prices and offer more
convenient shopping services to compete.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

three + five =