The Food Marketing Institute's latest "Food Retailing Industry Speaks" report, announced late last week, revealed the top concerns retailers have in a rapidly evolving industry.
FMI surveyed 101 U.S. and Canadian food retailers and wholesalers, representing 33,300 stores, about their biggest concerns as well as areas they're looking to for growth. Retailers reported that the cost of health benefits had the biggest negative impact on sales, with interchange fees and energy costs closely following. In 2017, healthcare costs as a percent of sales rose 2.1%, up from 1.7% of sales the year prior.
The impact was widespread. Seventy-two percent of food retailers felt a pinch from increased healthcare expenses, but they dealt with the higher costs in a myriad of ways. Fifty-one percent fully absorbed the costs while 49% increased employee premiums, 30% looked into other ways to control costs including changing plan designs or features, and 15% raised eligibility requirements on benefits. Most food retailers see this concern continuing and 69% expect health care costs to rise even more this year.
“It’s not easy when your biggest concern is likely to grow bigger, but that’s the way food retailers see it,” said Leslie Sarasin, president and CEO of FMI, during a webinar announcing the results.
In 2018, healthcare spending is projected to rise 5.3%, according to the U.S. Centers for Medicare and Medicaid Services, a government health agency. The increase reflects higher prices for medical goods, services and Medicaid costs in the U.S.
The next biggest concern for retailers is credit card and debit card fees. In 2017, debit cards were used for 36% of sales and credit cards for 32%, according to FMI. Despite ongoing fee disputes between retailers and credit card companies, these percentages remained steady.
Sparring between retailers and credit card companies heated up so much that in August, Kroger banned the use of Visa credit cards at its Food Co stores in California.
Food retailers are split on the effects of multiple consumer trends, including snacking, the effects of technology and changing demographics on their businesses. Smaller retailers were less likely to say these changes are having a positive impact than larger businesses.
Meanwhile, retailers are focusing more on social initiatives that are becoming increasingly important to consumers including transparency and waste reduction. Over the last year, many supermarket chains have announced initiatives to reduce food waste, including Kroger's plan to eliminate food waste by 2025 and Giant's plan to divert 90% of its store's food waste to recycling. According to FMI, two-thirds of retailers have set goals and timeframes for food waste reduction while 19% have none but are working on establishing them.
“Food retailers understand that shoppers may be focused on products and ingredients, but they also recognize their customers are increasingly assessing retailer's social efforts as well,” said Sarasin.
Overall, food retailers expect to see more consolidation within the industry, anticipate low inflation and easing regulations. Recent months have seen a few key mergers and acquisitions, including United Natural Foods' acquisition of Supervalu and Schnucks' acquisition of 19 Shop 'n Save stores in St. Louis.
Begrudgingly pursuing e-commerce
Retailers are trying to be more competitive on the digital playing field, and many have expanded into online delivery and pickup over the past year. Still, a majority of retailers seem to see e-commerce as the price of doing business these days, with just 40% predicting their online sales will grow.
Sixty-three percent of respondents are pursuing e-commerce, but according to FMI, online revenue doesn’t exceed 3% of total sales. Even though that number is small, Sarasin says companies should stay vigilant with their offerings. Two-thirds of food retailers involved in e-commerce said they saw sales increase by more than 10% in 2017, with the rest reporting less or no gains. Food retailers also listed an average of 27,000 SKU online, but the total number by store varies from a few thousand to 80,000. Online transactions per week averaged 2,200 while the average transaction size is $116, considerably larger than in-store transactions of $34.61.
Although the numbers are positive, few retailers are claiming high levels of e-commerce sophistication.
“As experimentation with online sales strategies grow, so does the awareness that there’s much more we need to learn about this new shopping style,” said Sarasin.
“Food retailers understand that shoppers may be focused on products and ingredients, but they also recognize their customers are increasingly assessing retailer's social efforts as well.”
president and CEO, The Food Marketing Institute
Beyond online, retailers are using other strategies like local assortment, deli prepared foods, organic offerings, private label brands as well as fresh meat and produce as primary growth strategies. Space allocation is a solid indicator as to where companies anticipate growth, and fresh food segments lead the pack. Eighty nine percent of respondents see increases for deli, fresh, prepared, and grab-and-go selections over the next two years, while 68% anticipate having to make more room for fresh produce and 67% more space dedicated to deli, fresh prepared, self-serve bars and buffets. Seventy-one percent see a boost in space allocated specifically for online fulfillment activities.
New opportunities and additional costs
All of these changes don't come without costs, financial investment and some economic risks.
Retailers expect to allocate more labor for e-commerce, technology, and other growth areas including trained and certified chefs, in-store butchers, produce butchers, cheesemongers, seafood specialists and dietitians. These added positions can enhance the customers’ in-store experience, FMI noted.
Other projects retailers are experimenting with are small format stores, with almost half of retailers reporting they're trying them out and 45% exploring green building techniques.
Many retailers have added small format stores to their mix, including Publix, which recently opened its fifth GreenWise store; Hy-Vee's HealthMarket concept, which centers on healthy foods; and Meijer, which recently opened the 36,000-square-foot Bridge Street Market in Grand Rapids, Michigan.
In order to advertise their new services, projects and sales, grocers anticipate a 39% decrease in the use of print circulars, the biggest decliner in media platforms, over the next two years. Other platforms expected to decline include television ads, billboards, outdoor signage, radio ads, direct mail, Snapchat, and podcasts. Less costly digital channels are taking their place.
As consumers’ wants and needs continue to change, retailers are boosting their productivity. Average transaction size increased from $30.02 last year to $34.61. Retailers also reported an increase from 13,117 rings last year to 13,201 this year. Because of these increases, average weekly sales per store exceeded $400,000. However, this increase in revenue was offset by higher labor and healthcare costs which resulted in an overall flat net income rate.
“This year’s report shows how food retailers are addressing increased competition by boosting productivity,” said Sarasin.