E-Commerce, deflation, hyper-competition continue to weigh on grocery store profits

The grocery business remains challenged amid a number of factors beyond its control and analysts expect weaker financials from grocers like Whole Foods, Wal-Mart, Kroger and their competitors.

Walmart U.S. recently began closing a few Neighborhood Market stores. The retailer said it gives notice to local media in the affected areas and does not plan to make a public announcement of pending closures which are part of the company’s efforts to evaluate the feasibility of every store it operates. Store closures in St. Petersburg, Fla., Denver, Chicago, Charlotte, N.C., and Marietta, Ga., have been reported by Walmart U.S. in early 2017.

Wal-Mart Stores will report fourth quarter earnings on Feb. 21. Grocery accounts for just over half of Walmart U.S. sales. As the nation’s largest grocer, Walmart’s grocery sales are closely watched by the industry and often seen as a barometer on consumer spending habits.

At the other end of the grocery spectrum, Whole Foods Market recently reported plans to close three of food-production facilities in Maryland, Georgia and Boston as it streamlines operations and reduces costs amid competitive pressures. The production facilities furnished prepared foods sold at the retailer and account for about 19% of overall company sales. Last year Whole Foods management outlined a plan to slash expenses by $300 million by the end of this year. In November, CEO John Mackey said the company was more than halfway toward that goal.

Industry analyst Jay Jacobowitz of Retail Insights said Whole Foods has to reduce overhead and will likely outsource operations such as bakery rather than bring them in-store. He said it’s not uncommon for food retailers to outsource prepared foods operations as Kroger did in 2015 when Sysco began supplying sandwiches and salads.

Wal-Mart Stores has also began leveraging procurement responsibilities for food and commodities into a centralized global effort given the retail giant operates in grocery around the globe. Streamlining the operations made sense according to Walmart International CEO David Cheesewright who spoke on this issue in June 2016. Cheesewright and Walmart U.S. CEO Greg Foran have touted the benefits of working together in this area to take costs out of the system and get more of private label goods for customers.

FOOD DEFLATION REDUCES REVENUE
Analysts expect grocers will continue to tweak operations to save overhead costs as food price deflation and competitive pressures weigh on top line revenue and squeeze margins. The latest Consumer Price Index Food at Home report by the U.S. Bureau of Labor Statistics (January) indicated deflationary food prices in beef, eggs and produce. The Index reading declined 0.2% in December, which was the eighth consecutive monthly drop. The Food at Home metric, a barometer for grocery prices, fell 2%.

“Deflation at the grocery stores continues to moderate – though it’s doing so at a very slow pace,” noted Deutsche Bank analyst Shane Higgins.

Falling meat prices (-5.4%) in 2016 are the main catalyst for food deflation related to an oversupply of protein relative to demand. Eggs, also a source of protein, are priced 33.8% lower year-over-year. Grain prices are lower and that has resulted in modest deflation in cereals and bread products year-over-year.

First Data’s SpendTrend Growth report based on point-of-sales indicates grocery store sales saw a 0.5% growth rate in December, considerably less than 3.5% rate predictions. Grocery store sales in 2016 rose just 1.5% compared with 3.2% in the prior year.

ONLINE GROCERY GROWTH
A recent report from NPD Group looked at the rise of online grocery which is a threat to grocers not already playing in this growing field. NPD’s survey found 52 million U.S. consumers are doing some of their grocery shopping online. The NPD report said about 20 million consumers (current, lapsed or new to online) plan to increase their virtual grocery shopping behaviors over the next six months.

Walmart U.S has bet heavy in this area by expanding grocery pick-up services to more markets last year. Ravi Jariwala, corporate spokesman for Walmart.com, recently told Talk Business & Politics that customer response to the service continues to be strong. He said the service gets high customer satisfaction scores and high repeat user rates.

“The strong customer response is one of the reason we’ve grown from 5 markets last year to more than 100 this year,” he said.

NPD said even though online grocery shopping lags other e-commerce industries in terms of development, the fundamental shift of the country’s demographics is one reason behind greater adoption of grocery shopping online. The report said Millennials and Generation Z consumers who were born in the tech era gravitate to online grocery.
Millennials who often appreciate global cuisine can find what they need online and they see grocery shopping, prep and eating as an experience rather just sustenance. NPD said more than 60% of consumers who shop for groceries online are completely satisfied by the experience, with just 6% neutral or dissatisfied.

NPD said convenience is the top reason consumers like the online experience, but others cited delivery options and shipping deals, like Amazon Prime.

“Food and beverage manufacturers should monitor the quickly changing landscape with respect to grocery delivery services and online retailers to ensure their products are part of the assortment where it matters,” said Darren Seifer, NPD food and beverage analyst. “Brick and mortar retailers also need to adjust to ensure they’re not losing out with younger tech savvy consumers. Now is the time to start developing e-commerce programs or to expand your current services. Whether a manufacturer or retailer, now is the time to act while shoppers are experimenting and there is significant growth on the horizon.”