Americans aren’t shopping for groceries much at supermarkets, instead choosing to shop at discounters and specialty grocers.
An article in the Wall Street Journal said that according to banking and financial services group UBS, supermarkets’ share of U.S. grocery sales fell to 51 per cent in 2011; down from 66 per cent in 2000.
Discounters such as Walmart and Target have used food to attract customers who can then be tempted to buy more profitable housewares and clothing merchandise.
Craig Herkert, the head of Supervalu, a 4,400-store chain based in Eden Prairie, Minn., said other retailers have realized food and household basics can drive traffic.
“The fact is, consumers have a wide range of sources for their groceries and that will continue, but our goal is to be relevant no matter what,” said Herkert, a former Walmart executive hired by Supervalu in 2009, in the WSJ article.
He added: “In this economy, it’s simply not acceptable anymore to have prices as far out of line as ours have been. But getting prices ‘right’ for us doesn’t mean we are going to become a discounter. It means we have to narrow that pricing gap.”
Supermarket chains like Supervalu and Safeway are finding them caught in the middle; affluent shoppers are buying up organic produce at Whole Foods Market, while Dollar General and Aldi appeal to budget-conscious shoppers.
“Supermarkets cannot continue to do the same things they did in 1990s and expect a different result than the one seen over the last 10 years,” said UBS analyst Jason DeRise in the article.
For example, last year Supervalu sold $37.5 billion of merchandise, but its margins were brutally thin—at just 4.9%—before it absorbed interest, taxes, depreciation and amortization costs.
In total, it lost $1.1. billion.
The article points out that in the past grocers would use promotions to attract shoppers, earning profits through products sold at full price. However, nowadays, frugal customers are stocking up at warehouse clubs such as Costco, and use supermarket trips for specific deals all leading to lower sales and thin profits.
Grocery sales for Walmart and Target have become even more important.
The article stated that groceries accounted for 55 per cent of Walmart’s $264.2 billion in U.S. sales in the year ended Jan. 31, 2012, up from 41 per cent just four years ago.
This year, the retailer invested $1 billion to lower food prices.
Target, meanwhile, sells a full assortment of groceries only in its 250 Super Target stores.
However, fresh and expanded frozen food sections are now in 75 per cent of the chain with food accounting for 19 per cent of Target’s $68 billion in sales in 2011, up from 16 per cent in 2009.
“Food is the single most important traffic driver,” said Paula Rosenblum, managing partner at retail research firm RSR Research in the article. “It’s a low-margin business but it’s fast moving.”
So what’s a grocer to do?
In response, grocers have cut back on staff, hurting service levels.
Some chains are doing well though. Kroger, the second-largest food retailer after Walmart, reported its same-store sales, rose 4.2 per cent for the quarter.
Kroger has weathered the storm, by using insights from its shopper loyalty card data to customize offers to shoppers.
Also, the article points out that part of the calibration is knowing which products grocers can price higher than Walmart and not lose customers.
For example, frequently purchased items like bread or milk, Kroger’s pricing is 8 per cent to 10 per cent higher than Walmart, while Supervalu and Safeway stores were priced 18 per cent to 20 per cent higher.
“Traditional supermarkets have gotten too high in price, and when you get to that point, price does start to trump convenience,” said Mike Schlotman, Kroger’s chief financial officer, in the article.