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It doesn’t seem all that long ago that if you were running on
empty as you made your rounds to get feed, parts, lumber and
whatnot, the best you could hope for was a handful of peanuts
and a soda pop, if they had a vending machine. Now, about
anywhere you go, there’s food and lots of choices.
In fact, what the industry terms non-traditional food
sales—everything from that purchased at drug stores to dollar
stores to super centers—have skyrocketed. According to the
Economic Research Service (ERS) these sales accounted for 33.4%
of all food sales in 2005. Those sales amounted to 8.9% in 1994;
they’re expected to account for 40.5% by 2010.
It’s the warehouse clubs like Costco and Sam’s Club, and super
centers like Target and Wal-Mart that are leading the way,
accounting for 20.7% of food sales in 2005. Food sales in these
two categories comprised only 6.8% of food sales in 1994, but
are expected to tally 28.0% in the next six years (Table 1).
Wal-Mart opened its first Super Center in 1988. Just 12 years
later it had become the largest grocery retailer in the U.S.
Moreover, whether the proverbial chicken or egg, we Americans
are spending almost as many of our food dollars for meals eaten
away from home as for those enjoyed at home.
“At the turn of the 20th century, Americans bought virtually all
their food as ingredients or in raw form to be prepared for
meals eaten at home,” explain the folks at the Food Marketing
Institute (FMI) in an insightful paper, Food Retailing in the
20th Century; Riding a Consumer Revolution. “For decades,
restaurants held an insignificant share of the food retailing
market. A century later—boosted largely by the growth in
fast-food sales—consumers are buying nearly half their food at
restaurants and takeout establishments.”
Specifically, ERS data says about 48.5% of total food
expenditures in 2005 were for purchases away from home, compared
to 46.1% a decade earlier.
Fighting for Survival
In response, retailers have rapidly consolidated.
“The U.S. food retailing industry has undergone unprecedented
consolidation and structural change through mergers,
acquisitions, divestitures, internal growth, and new
competitors.” That was an observation by Phil Kaufman at
ERS…back in 2000.
Since then, retail consolidation has only accelerated. According
to ERS, by 2005 the 20 largest retailers accounted for 61.6% of
total U.S. grocery store sales, up from 40.6% in 1995. In 2005,
the four largest retailers accounted for just over 30% of all
food sales.
Kaufmann pointed out, “A number of long-term trends are
prompting food retailers to consolidate: changing patterns in
overall grocery sales, increased spending for prepared foods and
meals away from home, and growth of food sales by nontraditional
retailers. These trends make for a very competitive food
retailing industry, and with low inflation rates in the general
economy, retailers’ ability to raise grocery store prices is
limited.”
In other words, retailers have generally sought the advantages
of size to reduce unit cost of production and gain competitive
advantage. As they’ve done so, though, competition from
non-traditional players has also increased.
“An apparent paradox in food retailing today lies in two
parallel trends:the industry is consolidating while competition
among traditional and new channels is increasing dramatically.
In addition, consolidation is not leading to increased food
prices,” says the FMI analysts.
Consumer Wins
The continued decline in the amount of disposable income U.S.
consumers must spend on food stands as testament to the
increased efficiency of producers and a free market that readily
transmits direction, not to mention federal policy. Less
discussed, however, is the role played by retail competition and
consolidation.
For perspective, ERS says American consumers spent 11.7% of
their disposable income for food in 2005, right at half what was
needed in 1929. Unsurprisingly, American consumers spend less
for food than consumers in any other developed nation.
“Food prices have remained remarkably stable,” emphasizes the
FMI document. “From 1997 to 2006, yearly food inflation averaged
only 2.5 percent, according to the USDA Economic Research
Service and Bureau of Labor Statistics. This figure was only 2.1
percent in 2006 — less than the overall inflation rate of 2.5
percent. Contributing to the low food inflation rate are
increased efficiency and decreased waste; technology; category
management; and the many formats—from limited assortment stores
to warehouse clubs to super centers—that use low prices as their
main draw for consumers. Even if inflation increases, consumers
can always find bargains at these stores.”
Bottom line, as competition has increased consolidation,
consumer prices have actually declined over time.
Of course, such rapid consolidation comes with real and
perceived baggage, too. Typically, fewer and larger players
gravitate toward wanting to deal with suppliers that are also
larger and fewer. In the case of the beef industry, though the
level of packing concentration has remained fairly stable and
high, there’s too much capacity for the current supply. When it
comes to feedlots, consolidation and concentration continues to
advance.
On the other hand, more niche opportunities are also created for
those who don’t want to play the price game.
Consider natural beef. It’s still a small percentage of the
national beef mix, and likely always will be, but it continues
to grow rapidly.
Looking at natural and organic products collectively, ERS’ Steve
W. Martinez notes, “From 1999 to 2004, sales at the two largest
publicly traded fresh format stores that specialize in organic
and natural foods, Whole Foods and Wild Oats, grew by 159 and 45
percent, compared with a 13 percent increase for the entire U.S.
grocery store industry. Over the same period, sales by United
Natural Foods, a leading wholesale distributor of organic and
natural foods, increased by 95 percent, compared with a 16
percent increase for all merchant food wholesalers, excluding
manufacturers’ sales branches and offices.
That’s from a paper, The U.S. Food Marketing System: Recent
Developments,1997-2006 that Martinez published in May. In it, he
suggests, “Traditional food retailers that follow a
‘stuck-in-the-middle’ strategy will likely continue to lose
market share to nontraditional retail outlets and foodservice
companies. Traditional outlets that have higher costs than
Wal-Mart, fail to differentiate from the competition, and fail
to compete in a narrower market segment lack any competitive
advantage.”
Relationships Change
Spun differently, increased food marketing competition and
consolidation are shifting relationships, beginning with the
consumer.
“The business of retailing food is going through dramatic, if
not revolutionary, change. The causes are simple and complex,
visible and hidden,” explain the FMI analysts. “The singular
force driving the revolution is the consumer. The consumer’s
market power is growing strong and ingrained. Scanning data
drive product assortment with the help of business practices
such as category management.”
That’s a mouthful. Technology allows retailers to more
accurately track and predict what shoppers buy and what they
want the next time. That same technology has also enabled
category management, decreasing the need for costly excess
inventory.
As and example, Martinez points out, “Many of Wal-Mart’s
products are not stored at the warehouse, but are moved from
supplier truck to store-delivery truck through a process called
cross-docking.” Talk about just-in-time delivery.
Closer to home, all of this is why the beef industry has seen an
increase in branded programs, vertically coordinated supply
chain management, wider price gaps on same-weight, same-sex,
same class cattle sold in the same geographic area on the same
day, and all of the rest.
So, consumer buying power has driven retail competition,
consolidation and the innovations spawned by it. That doesn’t
look to change.
Table 1 • Share of grocery sales by nontraditional outlets1
1994 2001 2005 20102
Warehouse club 4.8% 8.5% 7.1% 7.3%
Super centers 2% 9.9% 13.6% 20.7%
Dollar stores (e.g., Family Dollar, Dollar General,
Dollar Tree, Fred’s, 99 Cents Only) na na 1.7% 2.1%
Drugstores (e.g., Walgreens, CVS, Rite Aid) na na 4.8% 4.5%
Mass merchandisers na na 5.7% 5.4%
Internet (e.g., FreshDirect) na .12% na na
Military commissaries na na .5% .5%
Other (mini-club, deep discount drugstore) 2% .60% na na
Total nontraditional 8.9% 19.14% 33.4% 40.5%
1
Sales include food and nonfood grocery items, health and beauty
items, greeting cards and magazines, alcohol, and tobacco.
2
Forecast
Sources: USDA ERS/ Caffarini and Cavanaugh, 2006; Griffith,
2002; Rogers, 2000. |
