Industry Spotlight: Grocery Stores

The nation’s 41,000 grocery stores have experienced a raucous 2020, due in large part to the COVID-19 pandemic. While grocery retail is a low margin, high volume business, sales surged during the second quarter of this year, driven by panic buying and a resurgence in home cooking.

The grocery store industry is concentrated, as the largest 50 firms account for 70 percent of industry sales. Competition is fierce and intense. Here’s a look at the retail grocery industry to help you determine if it might be a niche you’d like to include in your small- to medium-sized business (SMB) portfolio.

The big-picture numbers

The retail grocery business is a highly competitive, diversified industry with about 41,000 firms employing 2.5 million workers in 65,200 stores, and annual sales of $667 billion. The average grocery store employs 61-62 workers and generates over $16 million in annual revenue.

On average, a grocery store carries about 33,000 items, or Stock Keeping Units (SKUs). Those items translate into median store sales of about $455,700 per week or about $23.7 million per year.

As for their customers, consumers typically make 1.6 trips to a grocery store each week. The average U.S. household spends $113.50 per week on groceries.

COVID-19-related numbers

Retail sales in U.S. grocery stores rose 26.9 percent between February 2020 and March 2020 and rose 29.3 percent during March 2020 versus year-ago.
While many industries have been cutting jobs, the food and beverage store industry gained 43,500 jobs in May 2020, a 1.4 percent increase versus April 2020 and a 0.7 percent increase versus year-ago.
Online grocery sales, which include home delivery and store pick-up, rose 24 percent between April 2020 and May 2020, according to a Brick Meets Click. The increase reflects an 18 percent increase in the monthly number of online orders, from 62.5 million to 73.5 million, and a 6 percent gain in order value— from $85 to $90. Retailers expanded capacity and added more time slots to accommodate rising demand for online shopping.
U.S. sales of organic fresh produce rose 18.4 percent in April 2020 versus year-ago, according to the Organic Produce Network and Category Partners. Organic produce volume surged 20.5 percent in April 2020 versus year-ago, with growth outpacing that of conventional produce. Health scares often boost sales of foods that are perceived to be healthier or safer.
The price of groceries rose 2.6 percent between March 2020 and April 2020, the biggest monthly increase since 1964, as the U.S. supply chain struggled to adjust to the impact of the COVID-19 pandemic. Egg prices surged and increased 16.1 percent, while bread prices rose 3.7 percent, and juice prices grew 3.8 percent. Chicken and fish prices both rose 4.2 percent, and pork 3 percent, according to CNN.
Grocery retailers across the country are limiting the number of meat items a customer can purchase. Coronavirus-driven plant shutdowns are threatening the US meat supply, leaving the nation vulnerable to shortages. During the week of April 24, wholesale pork prices rose 29 percent, the biggest weekly gain since 2012, and wholesale beef prices approached record levels.

Three trends within the grocery store industry

Increased Industry Consolidation

The continued rapid growth of super-sized, discount grocers, such as Walmart and Target, is forcing ongoing consolidation of the retail grocery industry. The global buying power of such efficient companies has put an increased operational and financial burden on local neighborhood and independent grocery stores, as well as the traditional national supermarket chains.

When a smaller grocery store is in competition with these large food discounters, the smaller grocery store often must create a niche market by selling unique, premium quality, or ethnic foods, or offer specialized services not found in the large discounters. In some instances, a small grocery store may also be successful by locating in a mixed commercial-residential area close to, and convenient for, its customers.

E-Grocery or Internet Shopping

The convenience aspect of eGrocery shopping is the major attraction for consumers. Consumers are busier than ever, more mobile, more affluent, and increasingly impatient with mundane time-consuming tasks. As a result of these social and attitudinal changes, as well as concerns about shopping during the COVID-19 pandemic, more people are being drawn to grocery shopping online.

eGrocery companies usually fulfill orders with home delivery, but may also offer workplace delivery or customer pick-up options. The Food Marketing Institute and Nielsen forecast that 70 percent of consumers will be shopping online for groceries by 2024.

Changing Product Mix

The current economic environment has made consumers more cautious. This has led to reduced consumer spending and to consumers trading down to a less expensive mix of products. In many instances, customers are leaving their local independent grocer altogether and trading down to discounters.

On the other hand, some grocery stores are responding to this competitive threat by offering consumers more healthy-lifestyle foods, such as locally grown produce or organic foods. Many consumers are willing to pay more for these specialized products.

Risks to the grocery store industry to consider

The business exit rate for grocery stores from the end of 2017 to the end of 2018 was 7.07 percent, lower than the average for all U.S. businesses, according to data from Powerlytics.
In 2019, Walmart reported that it had $218 billion of grocery sales, or about 33 percent of all grocery products sold in the U.S. Walmart’s size and scale gives them significant distribution and operating efficiencies, as well as extraordinary negotiating positions and buying power, making them a very formidable competitor to all other grocery retailers.
Grocery retailers depend on large, complex information technology systems to manage their business operations including customer check-out, inventory management, product reorder, and statistical analysis of sales. Any interruptions or difficulties maintaining and upgrading these systems could be catastrophic to the business operations.
Payroll costs are a grocery retailer's largest operating cost, usually 9 percent of sales. Consequently, government mandated increases in the minimum wage or other benefits, increased costs of healthcare due to healthcare reform, or other government regulation affecting the labor force could result in a significant increase in grocery store operating costs.
A grocer's ability to obtain suitable sites for new stores is dependent on identifying and successfully entering into purchase or lease agreements on commercially reasonable terms. Competition among grocers for prime locations is making this increasingly difficult and risky.

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All of the Industry Intelligence in this post came directly from the Vertical IQ Industry Profile on Grocery Stores (as well as our free COVID-19 webpage). Reviewing this profile, or even doing a quick five-minute review of the industry’s Call Prep Sheet, gives you valuable insights into your retail grocery store prospect—their opportunities as well as the issues that may be keeping them up at night.