As much as the pandemic turned so many retail industries upside down it can be argued that one sector of retailing is coming out of this as the most changed of all.
The airlines, the restaurants, the hotels and the entertainment businesses all were devastated by Covid, but as they return, they look remarkably similar to what they were pre-pandemic.
[callout]Americans may have learned how to cook at home during the pandemic but probably more of us learned how to eat at home without cooking, courtesy of all that prepared food just a few clicks away.[/callout]
But not the grocery business. In so many ways and at so many companies, the aftershocks of the past 15 months have profoundly –and perhaps permanently — changed the way supermarkets go about their business. Quite simply the way Americans buy their food — and the way American businesses sell it to them — will never be the same again.
Three Course Corrections
There are three seminal changes in the grocery business that are directly attributable to the pandemic and are likely to remain factors in the industry for years — if not decades — to come. It is how each of the major players in grocery react to those changes and address the new environment that will determine the winners and losers in the field.
Yes, other retail sectors witnessed dramatic increases in the amount of business they are now doing digitally but none to the extent of the grocery sector. At the start of 2020, online purchases of grocery products represented somewhere between two and three percent of the overall $760 billion marketplace and they were growing excruciatingly slowly.
Grocers are still toting up the numbers, but when the pandemic era is tapped out, online will represent between 10 and 12 percent of all grocery sales with an estimated 60 percent of all Americans having bought groceries online. That still trails general merchandise — estimated at between a 15 and 25 percent share depending on the specific category — but it’s a five-fold increase in a little over a year. That’s unprecedented in any share of market swing perhaps in the history of retailing.
It’s a vague term at times but the integration of online and in-store capabilities has been the second big change in grocery shopping. Whether it’s curbside pick-up, BOPIS (buy online pick-up in store) or home delivery based on an online order, they’ve all exploded. Again, the numbers are all over the place, but some estimates peg the growth of curbside pickup at 85 percent over the past year and home delivery, either through third party services like Door Dash and Uber Eats or through the retailer’s own service (often in conjunction with Instacart or a similar service), is now a very substantial business.
And we may just be seeing the start of all of this. Two startups in Europe are now promising deliveries in 10 minutes…. yes, that’s minutes, not hours. Some of us take 10 minutes to pick-out which peanut butter to order.
Supermarkets have offered ready-made sandwiches, salads and even entire meals for years. But they’ve always been an accommodation, an add-on not to be confused with their core business of selling groceries. That’s changed as they’ve discovered the sales — not to mention the margins — of prepared foods are far better than cans of string beans and frozen pizzas. It’s why the latest thing in supermarkets are ghost kitchens, which are essentially mini-food factories, usually on-site, that make a wide variety of prepared dishes, from sushi to meatloaf, either for in-store pick-up or home delivery. Americans may have learned how to cook at home during the pandemic but probably more of us learned how to eat at home without cooking, courtesy of all that prepared food just a few clicks away.
These three big trends have all begun to readjust with the return of so many people back into stores, restaurants and travel. Early indications are that foot traffic in stores is up and online ordering is down from its peak last year. But just as quickly as these new habits took hold, they are unlikely to retreat anywhere near as quickly.
This may be especially true among older Americans, the group many predicted would be the toughest to convert to these new ways to shop for groceries. According to Coresight, 62 percent of current online grocery shoppers from the ages of 45 to 60 and 55 percent of those over the age of 60 plan to continue to use those services as frequently or more frequently after the pandemic.
The Big Boys Play Hard
How will the big national players — who are expected to pick up overall market share at the expense of smaller, localized food sellers who can’t keep up with the financial investments needed to stay competitive — move forward to deal with the post-pandemic grocery business? Let’s take a look:
The number-one seller of groceries in the country (as it is also the number-one general merchandise retailer too) experienced severe whiplash as it reinvented itself — and then pivoted again as the pandemic changed all the rules. Prior to Covid, Walmart was busy building out an online strategy based on upscale brands and its purchase of Jet.com without all that much focus on grocery ecommerce sales. That changed quickly last spring as it quickly began to offer curbside pick-up, home delivery and all kinds of ecomm capabilities it had eschewed previously. It rolled out a frequent shoppers’ program, modeled after Amazon Prime, and then upped it with its W+ membership program with no minimums. In-store lockers gave way to curbside pickup and then same-day deliveries.
On the prepared food side, Walmart is building out at least 50 ghost kitchens with a partner and continuing to offer readymade meals as a handy housewife helper (with due apologies to Ralph Kramden and the Chef of the Future). Walmart’s sales the past year jumped 6.7 percent (compared to 1.9 percent the year before), driven in large part by its grocery business which has been larger than general merchandise for more than a decade.
For Walmart, grocery has turned out to be the point of differentiation it has been looking for versus Amazon ever since it first began to realize ecommerce was a real thing. This point of differentiation, it must be said, was always there…hidden in plain sight. Those 2700 or so U.S. Walmart stores are the distribution points that big bad Amazon can only dream of, no matter how many DCs it builds every week. But the big question remains if grocery will be enough to make up for the incredible head start Amazon had while Walmart futzed around with obscure upscale fashion brands all those years.
The number-two seller of groceries in the country (and largest supermarket-only company), Kroger has dozens of proprietary brands from Ralphs and Smith’s to Harris Teeter, Fred Meyer and Pay-Less. Kroger’s localized approach to selling groceries ends once you get to the backroom where the corporation is working big time to ward off Walmart on one end and Amazon on the other, with centralized operations and an embrace of digital that would have seemed highly unlikely at the start of last year. So far, it’s working — at least during the pandemic, with Kroger’s sales up 8.4 percent for the past year, versus 0.4 percent the year before.
Kroger is growing in many of the same ways as its competitors. It offers the full range of omnichannel services, including home delivery — usually through Instacart — curbside pick-up and ghost kitchens. It says it expects to double its online business by the end of 2022 and it broke into the Top 10 e-commerce retailers of any kind in the U.S. in 2020, a remarkable achievement for a company that barely was a player previously. Kroger’s secret weapon is something its competitors do not have. Even before the pandemic the company hooked up with the British company Ocado to build centralized, highly automated distribution centers that would handle its home delivery business.
Most other grocers pick orders from existing store shelves, a timely and expensive process since stores are designed for maximum exposure of goods to consumers, not efficient warehousing. The Ocado model, just starting to roll out with the first DC opening in April in Ohio, is not exactly cheap either: $55 million to build this first one. There are at least ten more in the works. And of course, with grocery shopping such a localized proposition with perishable food and regional brands, it will take a lot of these AI-driven facilities to be competitive with the traditional in-store, pick-and-pack processes that its competitors use. With potential labor shortages and rising wages, automatic order picking has great appeal and delivers a competitive edge. Add to DC automation and self-driving delivery vehicles and the age of robo-groceries could be closer than you think.
When the biggest ecommerce company in the U.S. bought Whole Foods in 2017 for $13 billion, it not only represented Amazon’s single largest acquisition but also raised any number of questions all centering on one question: Why? Five years later we’re still not clear what the reason was although the most widely accepted theory is that the Bezos Boys needed a crash course in the supermarket business, and this was as good a Cliff Notes primer as any. In fact, Amazon has been remarkably hands-off on Whole Foods, keeping founder CEO John Mackey in place. Other than layering on Prime benefits and adding some general merchandise pick-up lockers to the stores, Amazon has pretty much let the upscale grocery chain continue as business as usual.
But behind the scenes, obviously a lot more has been going on. The first Amazon Go store opened a year after the Whole Foods purchase, offering fully autonomous shopping with more cameras than a Cecil B. DeMille bible epic and twice as many prayers that consumers would get the concept. Eventually about 25 of them opened, resembling convenience stores more than full-line supermarkets. Now they have been joined by Amazon Fresh locations, which are closer in size to smaller national chains or a large Aldi location. In fact, the Go stores are being rebranded under the Fresh banner and one can assume, given Amazon’s past track record, that once they work out the kinks they will start to come fast and furious. Amazon rarely does anything at half-speed…if occasionally some of their initiatives have been half-assed.
Where do these Fresh branded stores fit versus Whole Foods? A good question that we assume will now be answered by new CEO Andy Jassy who took over in early July as Jeff Bezos gets ready for his first space flight. Grocery remains the holy grail for Amazon, the one category it has yet to fully conquer even as it has come to represent somewhere between 40 and 50 percent of all ecommerce sales in the U.S. Clearly from what we’ve seen so far, the Heinz ketchup and Perdue chicken business has proven to be tougher than books, detergent, streaming services and even apparel. But if the pandemic proved anything it’s that big swings in the marketplace can come anytime…and they can come pretty quickly.
All The Rest
This isn’t to say that everybody else who sells grocery products is an also-ran — or that they all have similar strategies. Walmart and Kroger, along with Albertsons and Ahold Delhaize (both of which also have multiple nameplates) and Costco combined represented about 42 percent of all grocery sales in 2020, according to Coresight. That leaves more than half of sales in the hands of smaller, regional players or up-and-coming national chains like Aldi and Lidl.
Albertsons (Safeway, Acme, Vons, Shaw’s) and Ahold (Stop & Shop, Food Lion, Giant) are pursuing similar strategies as their larger competitors, including online and omnichannel, though neither has the centralized distribution center structure of Kroger. Target, which is still a relatively small player in groceries despite recent efforts to get up to speed, has gone even further, buying the delivery service Shipt to help give it an advantage.
Warehouse clubs like Costco, Sam’s and BJ’s, have their own approach to the grocery game, especially useful if you need a 55-gallon jug of mayonnaise. Each has been building out its ecomm and home delivery capabilities, adhering to the same playbook as dedicated supermarkets. Sam’s has gone a step further, testing an Amazon-Go-like fully automated grocery outpost in Dallas. The fact that it has not rolled out the concept elsewhere would seem to indicate its either a one-off test designed as an experiment, or it hasn’t worked…or both.
Aldi, and to a lesser extent its doppelganger Lidl, seems to be putting all their grocery eggs into their stores. Neither has much in the way of ecommerce although they do offer some omnichannel services. Nevertheless, Aldi is poised to become the third largest grocery chain, by store count anyway, sometime in the next year or two, approaching more than 2,300 units. Lidl is way behind given its fairly recent entry into the U.S. market (both are German exports) but that’s not to say it will stay that way. Both chains have taken the same stripped-down approach of warehouse clubs, but with more emphasis on private labels and very limited selections. As such, they each represent serious competition for the lower end of the Walmart market in a way that dollar stores — which are also ramping up their food offerings — have never been able to.
Those dollar stores, along with convenience stores and drug chains, represent tens of thousands of storefronts and if their selections and prices may be out of whack with the best of the dedicated supermarkets, they all are siphoning off bits and pieces of the overall grocery market.
And lurking out there somewhere are grocery-only ecommerce startups, ghost stores if you will, that could represent the next generation of food shopping. As much change as we’ve seen in the grocery business the past year, it’s likely there’s plenty more to come. That’s why it’s so hard to make sense of all of this and predict the future: food for thought indeed.