The birth of the modern, self-service grocery store is believed to have come roughly 100 years ago, in 1916, when the flagship Piggly Wiggly store in Memphis, Tenn. opened its doors and offered customers the convenience of checkout stands, shopping carts, and the ability to see, touch, and smell products--with prices clearly marked--before purchasing them.
The supermarket experience remained more or less the same for the next century, with the exception of increased store footprints, expanded product lines, and some technological bells and whistles. The past few years have more than made up for that period of stability--and the decade or so to come is setting up to be just as transformational, particularly in the U.S. and Europe. In its series of reports, S&P Global Ratings analysts are letting investors know how rated grocers and consumer goods companies are racing to get ahead of the current disruption across the food retail industry.
Conventional grocers still represent the biggest players in food retail in the U.S., but they've been losing market share for decades. Non-traditional food retailers such as wholesale clubs, and dollar stores continue to expand their grocery offerings, and retailers of all stripes have added food as a means of driving traffic to stores, given customers' growing preference to shop online. Beyond e-commerce competitors, meal-kit providers, and dollar stores, the fight for food dollars includes restaurants, with Americans now spending more money dining out than they do on groceries.
Grocers Must Adapt To Fresher Concepts
To counter this increased competition, many of America's grocers have begun positioning themselves to meet rapidly shifting customer demand. We believe the borrowers we rate in this sector that can manage this transition quickly are in the express lane toward success.
The hard-discount model offers a limited assortment of low-priced, largely private-label merchandise in conveniently located stores and appeals to a growing cohort of value-oriented customers. This makes it critical for conventional grocers to introduce unique offerings, focus on fresh and prepared foods, and remain price-competitive on staples.
The same story applies to grocers in Europe, the Middle East, and Africa (EMEA)—one would be hard-pressed to find a single food retailer in the region that isn't reviewing its business model, cost structure, and investment plan. Much of this involves meeting changing consumer preferences—particularly for millennials, whose shopping habits are proving quite different from those of previous generations. Younger consumers are typically less brand-loyal. They depend more on word-of-mouth or online advertising and customer reviews to make purchasing decisions.
Retailers that were relatively early entrants into e-commerce are now investing to improve their capabilities—while others have committed substantial amounts of capital for the next few years to build strong online offerings to reach customers on nearly every social media and digital platform. At the same time, European retailers have slowly but definitively been closing stores and trimming selling space in the past few years. In general, most retailers (though not all) are predominantly reducing non-food sections, which have higher but more-volatile margins, and are more exposed to online competition. Still, the rush from the hypermarket to the convenience store format is massive. Those players that didn't invest sufficiently into online (probably because of its poor economics) and to the convenience store format will be most exposed to competition, and will have to commit large capital expenditures to catch up with early adopters.
Consumer Goods Companies Need To Expand Their Palate
This seismic shift affects suppliers, as well—especially consumer goods manufacturers. In this light, S&P Global Ratings sees the biggest risk for U.S. consumer products companies we rate as their inability to accelerate sales growth, as traditional channels will no longer enable companies to boost sales. We also see M&A as a key way companies are addressing these changes.
Today's customers are interested in healthier, cleaner products, and portable and environmentally friendly items, and they don't want to spend a lot of time shopping. Consumer-products companies that focus on delivering goods where and how consumers want, feed into faster-growing categories, and diversify their distribution channels and geographic presence will fare well. Those that don't could lose market share fairly quickly.
Again, similar conditions prevail in EMEA. Online and hard-discount retailers continue to make headway with European consumers, and product differentiation, pricing, and improved distribution are the keys to growth for consumer goods manufacturers.
The biggest risk for the borrowers we rate in the sector is that their core consumers are abandoning weekly visits to large supermarkets in favor of periodic delivery of long-life (or shelf-stable) goods, combined with shopping for fresh and chilled products locally. To mitigate this risk, manufacturers must consider which products will best suit this shift in buying behavior, which retail platforms they will need to support, and how they will adjust their own distribution systems. This runs in tandem with the continuing and entrenched evolution of discount retail, which in Europe has moved into the mainstream and is now successfully branching out into higher-quality and fresh-product offerings.
It's not often that "modernization" lasts a century, and so it's fair to say grocery retailers in the U.S. and EMEA have had a pretty good run. Now, it's incumbent on them to start running faster, lest they, like the fabled hare, find that they've napped through the race.
Writer: Joe Maguire