Grocery Stores

Industry report:

This category includes supermarkets, food stores, and grocery stores, primarily engaged in the retail sale of all sorts of canned goods and dry goods (such as tea, coffee, spices, sugar, and flour), fresh fruits and vegetables, and fresh and prepared meats, fish, and poultry.

Industry Snapshot

According to Dun & Bradstreet, 178,779 retail food stores employed about 2.8 million people in the United States. The Food Marketing Institute reported that 35,612 of these establishments were supermarkets (food stores that registered annual sales of more than $2 million). California was home to the most industry establishments, with 17,166, followed by Texas with 15,766; New York with 14,322; and Florida with 11,560.

Organization and Structure

In the early 2010s, like all retail industries, the grocery industry at its most basic functioned by obtaining goods from distributors and manufacturers, marking up the price to cover costs and allow for profit, and reselling the merchandise to the general public. Larger grocery chains typically manufactured or prepared a limited line of goods for exclusive sale in their stores. These goods included those prepackaged under a private label or store brand and those offered ready-to-eat through in-house bakeries and delicatessens.

The choice of which goods appeared on grocery shelves and how many of each was often carefully calculated by both manufacturer and grocer. Shelf space, considered a commodity, was purchased by manufacturers and distributors based on the amount of shelf space they wished to reserve for their products. On the retail side, grocery stores tracked their inventories frequently using a computer system integrated with their cash registers to determine the frequency and volume of sales for each product and ordered from their suppliers based on this data. In this arrangement, both manufacturers and retailers sought to maximize the volume of sales by giving ample shelf space to high-volume items while leaving room for lower volume and niche products. Also competing for space were the thousands of new products introduced every year.

The grocery industry defines supermarkets as grocery stores with more than $2 million in annual sales. This group was subdivided into affiliated independents and corporate chain supermarkets. Their differences lie in their respective financial and organizational structures.

Affiliated independents were characterized by wholesaler-retailer interdependence. Under the terms of an agreement between the wholesaler and retailer, the retailer took advantage of the wholesaler's purchasing power and had the right to use the wholesaler's name. In return, the wholesaler maintained the retailer's business for products purchased and also for services provided by the wholesaler.

Affiliated independents were further divided into voluntary wholesaler groups and retailer-owned cooperatives. The former were companies that bought the franchises of independently owned wholesalers. These, in turn, sponsored voluntary groups of independent retailers in their respective communities. The retailer-owned cooperative was an association of retailers who organized for the purposes of achieving greater purchasing power and other services. One such cooperative was United Grocers.

Corporate chain retail stores are company operated and include such well-known outlets as Safeway, Kroger, Supervalu, and Winn-Dixie. Because of their size, these firms typically bypassed third-party wholesalers and purchased in bulk directly from manufacturers.

Convenience stores made up the majority of units in the industry. There are two kinds of convenience stores: stand-alone units and gasoline station units. In general, the gasoline stores outperform stand-alones, leading some stand-alones to pursue niche markets to maintain their customer base.

Background and Development

"The food supermarket was perhaps the single most important innovation in retail distributive institutions in the entire period from 1850 to the present," according to Malcolm McNair and Eleanor May in The Evolution of Food Institutions in the United States. Supermarkets, particularly chains, were able to achieve greater economies of scale than smaller outfits and were thus able to charge the consumer less while still earning a greater profit margin.

Characterized by carrying a large variety of different food stuffs, dry goods, and health and beauty products under one roof, supermarkets developed in the early 1930s. The expansion of their stock beyond essential food items was encouraged by rising operating costs, particularly rent and wages, influenced by government regulation and union bargaining. Prior to this, food was sold through local "mom and pop" grocery stores and chain "economy stores." Faced with competition from supermarkets that undercut them by as much as a third or a half, the old style grocery store chains either converted to supermarkets, were bought out, or went out of business.

Supermarkets provided consumers with lower-priced goods during the Great Depression. Concentrating less on personalized service and more on bare-bones cash and carry, supermarkets emphasized the utilitarian aspects of the business and let the customer do the work of selecting and handling goods. With their emphasis on high stock turnover, supermarkets benefited from the new tendency toward bulk buying, supported by the growing use of refrigeration and the proliferation of cars. The growth of automobile traffic also influenced store location, with placement for traffic convenience becoming a primary concern.

From 1930 to 1950, the industry witnessed radical and far-reaching changes in methods of food distribution. Noticeable changes included increased self-service, the wide expansion of lines, and the great increase in the number and size of stores. Consequently, consumers benefited from greater choice and convenience. Through creative marketing techniques and low competitive prices, supermarket chains, both independently affiliated and corporate, had established themselves as the leading outlet for retail food distribution by World War II.

After 1950, increased competition fostered further developments in the retail food business. The large profit margins that stores had been able to realize were undercut as supermarkets found it necessary to increase print and television advertising and initiate such promotional efforts as trading stamps, games, and contests to win business. These efforts succeeded only in pushing up supermarkets' overhead faster than they could increase gross margins. These percentages narrowed consistently throughout the 1950s and 1960s. By 1954, the United States had 288,000 grocery stores, almost 100,000 fewer than in 1948.

By 1965, supermarkets had won a 71 percent share of all retail food sales, with superettes (stores having annual sales between $150,000 and $500,000 a year) accounting for 13 percent and small stores (sales less than $150,000 annually) for 16 percent. It had become evident by the 1960s that an integrated chain of self-service supermarkets could offer consumers a better deal due to their economies of scale. It was also clear, however, that cutthroat competition, which forced chains to keep their price margins low, was wiping out some of these economies.

Supermarkets sought ways to cut their costs even further and found inspiration in the new soft goods discount stores that were starting to appear. These businesses applied the same techniques pioneered by supermarkets to create low-price department stores. Supermarket managers subsequently decided to employ the discount idea in their own businesses. Doing so necessitated abandoning their previous promotional schemes and focusing on price cutting. For consumers, the appeal was immediate, and discount pricing spread throughout the industry.

While the industry was undergoing these transformations, many supermarkets simultaneously endeavored to raise their profit margins by expanding their stock to include more general merchandise. Others bought out existing discount department stores and opened the two kinds of stores side by side or under one roof in strategically located shopping centers. Another development was the trend for supermarkets to ally themselves with discount drug stores.

The net effect of these changes was a gradual decline in the number of general food stores--although the food retailing market saw some increase in the number of specialty stores. The 1972 census recorded 194,000 supermarkets with sales per establishment more than seven times greater than in 1948. By 1996, the number of grocery stores had fallen to 130,000, but sales had grown upwards of $400 billion.

The industry enjoyed moderate sales growth during the late 1980s, although it was not shared uniformly across the industry. According to the U.S. Bureau of Census, preinflation growth between 1987 and 1992 for the industry as a whole was 23.5 percent, which included a 50 percent sales boost in the convenience segment. Supermarkets reported a 22 percent net gain in the same period, while other segments of the industry languished around 10 percent. Different firms in the industry also fared differently in this period. For example, while some chains experienced growth in sales, others such as A&P suffered millions in losses.

Growth was dampened by the recession in the early 1990s, which hit retail grocers especially hard. Already operating under low profit margins due to fierce competition, numerous chains took severe financial beatings because of the austere consumer-spending climate. Fiscal weakness helped set the stage for several smaller chains to be acquired by their aggressive large-chain rivals. This consolidation trend continued into the mid-1990s. In 1993, the industry began a slow recovery from its heavy recession losses, but that growth was at its lowest point in the past 40 years. From an annual high of 7.2 percent sales gains in 1989, growth plummeted during the recession and then leveled to between 2 and 4 percent through the mid-1990s.

By the mid-1990s the grocery industry had at least shown signs of recovery thanks to its ability to remain competitive. Aided by a more robust economy, the industry posted modest gains because of corporate cost savings, horizontal and vertical integration, private label expansion, and innovative marketing.

To remain competitive with such formidable competitors as Wal-Mart, supermarkets pursued new avenues of growth, including the expansion of private label brands, the introduction of larger stores, and the development of specialty services like delicatessens. Private labels, which are brands offered exclusively by a particular chain, were seen as opportunities to boost sales growth by providing lower-cost alternatives for shoppers while retaining a greater share of the profit, since private label goods were often manufactured by the supermarkets themselves or under contract by third-party purveyors.

New store formats were another major component of the supermarkets' growth plan in the late 1990s. With such competitors as warehouse clubs and Wal-Mart and Kmart superstores, having more physical retail space was seen as an advantage. Most of the new store introductions by the supermarket chains boasted greater retail square footage than was typical of existing units in the industry. In 1998, the median average store size was 40,483 square feet. Many of the new stores were much larger than the median, with some reaching upward of 60,000 square feet.

In addition to broader nonfood selections, fresh produce and ready-to-eat dishes were often a focal point of the new stores. Enticing consumers with a wider selection of produce and high-quality, in-house delicatessens, these stores were designed to win back market share from both restaurants and discount superstores that were drawing away traditional grocery business. In the late 1990s, deli revenues were one of the fastest-growing segments of total supermarket sales, with 5.79 percent of total store sales.

The larger format supermarkets maximized profits in both food and nonfood offerings. The impetus toward these combination stores was large profit margins between 35 and 40 percent that could be made on many of the items they sold, including health and beauty items, deli food, pharmaceuticals, and bakery goods. In contrast, the markup on food and dry goods was only 15 to 20 percent, and stores devoted exclusively to grocery items were purely functional and provided less in the way of "shopping as entertainment."

Large chains also implemented savings cards to lure more customers. For example, Kroger began offering a "Kroger Plus Savings Card" that allowed members to receive special discounts on promotional items without having to clip coupons. Farmer Jack also offered a savings card and even teamed up with Northwest Airlines in Michigan in 1999 for a program whereby consumers could receive points toward airline travel every time they used their card. In 2004, Farmer Jack no longer required general consumers to show their savings card to obtain sale prices. Points were still accumulated for bonus rewards for Farmer Jack's Club Mom, among others.

Many larger chains have sought growth through acquisition. Albertson's purchased American Stores in 1999. Kroger, whose plans to purchase 74 Winn-Dixie stores in late 1999 were blocked by the Federal Trade Commission (FTC) in May 2005, bought Jay C Stores of Indiana in August 1999.

With overall spending slow during the early 2000s due to a sluggish economy, the retail grocery sector worked hard to keep costs down and revenues up. Although the industry was slightly more immune to changes in the economy because food is a basic, necessary expenditure, changes in shopping and spending habits were reflected in grocers' bottom lines. According to a survey of consumer attitudes conducted by the Food Marketing Institute in 2002, price was considered a major factor in food purchase for 84 percent of respondents, up from 77 percent the previous year.

In 2003 Elliot Zwiebach noted in Supermarket News, "Alternate channels of distribution are continuing to flex their muscles and grab food sales away from traditional supermarkets, forcing supermarket operators to adapt and change--or continue to lose market share." Wal-Mart continued to increase its market share, which had surged to more than 15 percent. Discounters Costco and Target also increased their presence in the grocery industry. In 2002 Costco's same-store food sales increased from 10 to 15 percent, and by the following year the company had become the third-ranked company in the industry, after Wal-Mart and Kroger. Yet while the discounters were growing in size, product areas that were growing were the pricier nutraceuticals, natural and organic products, as well as ethnic foods categories. Niche marketing was beginning to define a store's success or failure far more than price points.

By 2005, there were 67,252 supermarkets and grocery stores in the United States, 3,137 warehouse clubs and superstores, and 121,209 convenience stores and gasoline stations with convenience stores, according to the Food Marketing Institute. Supermarkets alone had sales of $499.5 billion in 2006. Other figures showed that for every $100 spent in stores, $50.10 was spent on perishables, such as produce, bread, meat, and dairy. Beverages, including alcohol, took $8.26 of the total; main meal items, $6.84; snack foods, $4.42; and other food, $11.30. The remaining amount was spent on pharmacy items, health and beauty care, and other nonfood grocery items.

In the mid-2000s the grocery industry experienced a shift of market share commanded by discounters such as Wal-Mart. According to Supermarket News, Wal-Mart made up 17.5 percent of the market share in 2007 between its neighborhood markets and supercenters. All superstores and warehouse clubs made up more than 21 percent of the market share, with grocery stores falling to 56.5 percent.

With so many options available to grocery consumers in the mid-2000s, stores had to fight for customer loyalty. However, 75 percent of consumers shopped in five or more grocery channels in 2007, according to Supermarket News, splitting their shopping among supermarkets, superstores, warehouse clubs, and convenience stores. Value pricing and convenience were the major factors in migration between grocery outlets.

Aside from pricing strategies and customer rewards programs, stores waged the battle to keep customers by trying to offer the best "shopping experience." Cleanliness played a major role toward that end as stores attempted to keep aisles clean in more ways than one. In-store displays took a hit as a consequence. Of the top 10 consumable categories in 2007, only salty snacks and bottled water managed to keep at least the same number of displays from the previous year. Overall, displays dropped 4.4 percent from 2006 and 9.1 percent compared to 2005.

Stores also attempted to tap into the health consciousness of the mid-2000s. According to a 2007 consumer snacking study, "Watch portion sizes," and "Look for snacks with nutrients" rated as the top priorities for parents' strategies with regard to children's snacking over "Offer low fat snacks," and "Offer low calorie snacks." Kroger exclusively offered Disney Magic Selections, a multicategory line including healthy foods and beverages to highlight healthy options. Leading retailers also offered nutrition education, such as Wegmans with its "Veggie Patch" classes for children.

Kroger was also aggressive with its customer rewards program. As a new feature to its Kroger 1-2-3 Rewards MasterCard program, in 2007 the company began offering points for purchases made from other retailers. The program included more than 300 retailers.

Current Conditions

The industry fared well during the economic recession of the late 2000s, as more Americans chose to eat at home rather than go out. During this time grocery stores focused on providing economical food choices for cash-strapped consumers. As the economy recovers into the 2010s, however, IBISWorld predicted that revenue for industry would "suffer marginally, as consumers eat out more often at restaurants because of lack of time and higher income levels." Increased competition was also expected to close smaller establishments and provide challenges for larger ones, who strove to pull customers from the large discount stores such as Wal-Mart.

According to Supermarket News, the 75 largest food retailers in the United States had combined revenues of $893.1 billion in 2009. The 10 largest food retailers accounted for $613.2 billion of that total, or about 69 percent. This figure was up 7.5 percent from the previous year. The number-one food retailer was Wal-Mart, followed by Kroger, Costco, Supervalu, and Safeway.

Industry Leaders

The grocery business was dominated by the multiunit and regional supermarket chains Kroger, Safeway, and Supervalu before Wal-Mart passed them in the early 2000s to become the nation's leading grocer. In 2009, Wal-Mart operated 3,100 combination discount/grocery stores and 595 Sam's Club stores.

Kroger Co.
Ohio-based Kroger operated approximately 3,620 stores across the nation, including 2,465 supermarkets in 2010. Acquisitions branched Kroger into jewelry and general merchandise in addition to groceries, but food stores still accounted for about 85 percent of sales. Doing business under approximately 24 banners, about 15 percent of sales were attributed to Kroger stores themselves. Among others, the company owned Dillon Food Stores, Fry's Food Stores, City Market, King Soopers, and Gerbes Supermarkets. It also operated approximately 775 convenience stores under the names Kwik Shop, Loaf 'N Jug, Mini-Mart, Quik Stop Market, Tom Thumb Food Stores, and Turkey Hill Minit Market. Overall sales for Kroger in fiscal 2009 totaled $76.7 billion.

Founded by Bernard Kroger in 1883, the company began as the Great Western Tea Company in Cincinnati, Ohio. It immediately set itself apart from its competitors by being the first grocery store to use print media advertising and to introduce an in-house bakery. By 1902, the company's name had been changed to Kroger Grocery and Baking Company, and the operation had expanded to include 40 stores in two states. Its growth continued unabated ever after. Since the 1960s, Kroger maintained a presence in the drug store market and, in the 1980s and 1990s, concentrated on operating combination grocery and drug stores, emphasizing one-stop shopping. The average size of these stores was 48,745 square feet.

One of Kroger's strengths was its decentralized structure, which enabled it to respond to localized buying habits. This arrangement allowed it to build customer loyalty. Its decentralized structure also allowed for flexibility in its pricing structure. Both "Every Day Low Pricing" and "High-Low" structures were used.

Supervalu.
Supervalursquo;s acquisition of more than 1,100 supermarkets from Albertsons pushed the chain from ninth to second place in the U.S. retail grocery market with about 4,290 stores nationwide. Among the more than 12 banners added to Supervalu's store roster that already included Shoppers Food & Pharmacy, Cub Foods, and Shop 'n Save were Albertsons, Acme Markets, and Shaw's. Supervalu had fiscal 2009 sales of $40.5 billion.

Safeway Inc.
Safeway had 2009 sales of $40.8 billion. After going public in 1990, California-based Safeway pursued a course of vigorous expansion that included its 1997 acquisition of the 320-unit California chain The Vons Companies, Inc. In 2009, Safeway operated approximately 1,725 stores, primarily in the West, Southwest, and mid-Atlantic regions. Safeway also had substantial holdings in Canada and Mexico and owned grocery e-retailer GroceryWorks.com.

Workforce

According to Dun & Bradstreet, about 2.8 million people were employed by retail grocers in 2010. About 46 percent of employees worked for establishments that employed more than 100 people. California accounted for the largest number of employees, with 279,215, followed by Florida with 232,803 and Texas with 199,705.

U.S. Bureau of Labor Statistics figures showed that cashiers, stock clerks, and order fillers accounted for about half of the workforce in the late 2000s. Almost one-third of the workforce was between the ages of 16 and 24. Overall employment in the industry was expected to increase at a rate of about 0.5 percent between 2008 and 2018.

Research and Technology

Electronic coupons and U-Pons became available in the late twentieth century. Many grocery store chains offered printable electronic coupons that were available on company web sites. This electronic form of saving allowed customers to select coupons they wished to receive.

Research in the grocery industry focused on technologies to help stores reduce costs and increase efficiencies. Retailers continued to invest in technologies that would improve their accounting, ordering, receiving, and scheduling systems, particularly that which would integrate these operations, which in some cases were done on paper, into a single computer system. For instance, Grocer Systems Support software, marketed by GSS, offered programs for inventory control, bill-back tracking, direct buy ordering, shopper tracking and analysis, direct store delivery, cashier security analysis, and accounts receivable analysis.

One of the most revolutionary of these is the Efficient Consumer Response (ECR) scanning system. The system works as follows: a customer selects a product and takes it to the cashier for checkout; the cashier runs the item through the scanner, which records the transaction; the scanner then sends a record of the sale to a central computer system, which itself is networked to the product manufacturer's computer; the manufacturer notes the sale and automatically orders a replacement on a just-in-time basis. An automatic ordering system enables the product's manufacturer to match production with demand using this information about product movement and forecasting techniques. The result is that product production becomes directly linked to consumer demand, eliminating the need for the retailer to store large amounts of inventory. When the merchandise arrives at the store, the computer system acknowledges its receipt and issues a computer-generated payment for an electronic fund transfer payment. This system eliminates the need for paper invoices and streamlines the accounting process.

Crossdocking, which, according to Stores magazine, moves products from a supplier's truck through the distribution center and onto a store-bound vehicle without putting them into pick or reserve slots, is the second phase of ECR. It was introduced to reduce warehouse costs and increase service. However, the grocery store industry was slow to implement this process in comparison to the department store industry. Supervalu opened one of the first crossdocking facilities in 1996, which the grocery industry looked to as a model.

On the consumer side, several further technologies were implemented. Many grocery stores installed at the point-of-sale (POS) various card-scanning devices that allowed customers to pass their credit, debit, or store-issued check cards through the scanner at the counter. Use of store-issued magnetically encoded identification cards, or check cashing cards, represented a significant convenience over the common practice of requiring the customer to provide multiple forms of identification at the point-of-sale each visit, especially for shoppers paying by check. The results for retailers who implemented such systems were speedier checkout lines, more thorough validation of checks, and a reduction in bad checks being passed.

In an effort to improve customer service, enhance operations, keep pace with competitors, and, above all, lower costs, in the early twenty-first century operators explored new payment technology and updated POS applications, including using smart cards and customer self-checkout systems. According to research firm RBR, North America had 84,000 self-checkout units at the end of 2009, which represented about 75 percent of the world total. Grocery stores were one of the most popular retail outlets for these services, and the number of self-checkouts was expected to grow throughout the 2010s.

Source: http://goo.gl/7lc04z