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What will the post-pandemic growth slowdown do to grocers?
After scrambling for months to meet unprecedented demand, grocers are facing new challenges as vaccines roll out and consumers return to normal spending patterns.
Due to tough comparisons against last year’s stockpiling and home-cooking trend, several chains are already predicting a deceleration. According to fourth-quarter investor calls:
- Kroger is projecting same-store sales to decline three to five percent this year after expanding 14.1 percent in 2020;
- Sprouts Farmers Market is forecasting same-store sales will decline in the low-to-mid-single digits in 2021 after rising 6.9 percent last year;
- Grocery Outlet expects same-store sales in the first quarter to decline in high-single digits after climbing 12.7 percent overall in 2020;
Analysts expect a more promotional climate to arrive that will drive traffic as Americans get more comfortable returning to restaurants. Strong eat-at-home trends led to less discounting in 2020.
In January, Barclays’ analyst Karen Short downgraded her ratings on Kroger, Albertsons, United Natural Foods and SpartanNash on her belief that the retailers are more vulnerable to competition from Costco, Dollar General, Target and Walmart as consumers return to being price sensitive.
Already thin margins in the sector are expected to be pressured by elevated online purchases post-pandemic and profitability by continued investments to support same-day delivery and curbside pickup. Food inflation is also expected to remain a headwind due to logjams at ports.
Grocers, however, are encouraging analysts to focus on two-year same-store numbers to measure progress and believe changed behaviors resulting from the pandemic will create tailwinds in the years ahead.
On Albertsons’ recent quarterly call, Vivek Sankaran, CEO, noted that shifts to flexible workweeks and permanent work-from-home routines should support more breakfasts and lunches at home. He also said many consumers “rediscovered their passion for cooking” and are prioritizing healthy and fresh products. He said, “We believe that purchases of fresh product drives trips as our loyal customers often stock up on shelf-stable items in one trip, but come back frequently for fresh product.”
On Ahold Delhaize’s fourth-quarter call, CEO Frans Muller said, “Many consumers have found a new love for eating at home and found new ways to engage with our brands, both online and in-store, which are behaviors which we think will have a lot of stickiness.”
- Grocery stores’ pandemic boom is over – CNN
- 3 Reasons Kroger Stock Has a New Critic – Barron’s
- Analyst Sees Little Upside for Conventional Supermarkets in 2021 – Winsight Grocery Business
- The Kroger Co’s (KR) CEO Rodney McMullen on Q4 2020 Results – Earnings Call Transcript – Seeking Alpha
- The price of food and gas is creeping higher — and will stay that way for a while – NBC News
- Grocers will have to raise game after year of plenty – The Times
- Online grocery sales will skyrocket but margins take a hit, analysts say – MarketWatch
- Albertsons Companies, Inc. (ACI) Q3 2020 Earnings Call Transcript – The Motley Fool
- Management’s Prepared Remarks Q4 2020 Earnings Call – Ahold Delhaize
Discussion Questions
DISCUSSION QUESTIONS: Do you see a rocky path ahead for conventional supermarkets over the next year? What new challenges may they face? What pandemic-influenced tailwinds should grocers look to for continued momentum?
Poll
BrainTrust
Ben Ball
Senior Vice President, Dechert-Hampe (retired)
Ken Morris
Managing Partner Cambridge Retail Advisors
People still got to eat. No doubt the increased costs associated with the pandemic will present headwinds as stores start to comp, but the offset is some of the new trends in home cooking as noted. I believe that shopping patterns have changed for many customers, and some of these will persist while others will revert to pre-pandemic times. I suspect that some of the goodwill that grocery retailers created by serving customers through the toughest times during the pandemic will be rewarded with loyalty.
All those Instant Pots and air fryers purchased last year aren’t going to be squirreled away in the cupboard anytime soon. Food conversations around the office are split down the middle between fantasizing about which restaurants we want to go to first and the amazing meals we cooked last night. Lots of folks leveled up their cooking skills and discovered they really enjoy it. Now grocers have more opportunities to shift customer conversations to discovery and service, and away from a pure-price model.
It will be a rocky path for the grocery retailer who thinks this surge of business will last forever. As people feel comfortable going back to restaurants – as restaurants open back up to full capacity – there will obviously be a drop in the average weekly grocery bill of the consumers who return to some sense of pre-pandemic normality. However there have been some new habits formed by consumers that should make store sales better than 2019, even if they drop compared to 2020 and early 2021. Forecasting will become more important than ever to ensure the right inventory levels are maintained. Retailers must look at data, watch store trends, and grab whatever information they can get that will help them make good decisions for the future.
2020 was an exceptionally good year for grocers. Stockpiling early on in the pandemic and a net transfer of spend from foodservice to food retail across the whole year both pushed up sales dramatically. As the pandemic abates, it is inconceivable that most retailers can beat this high watermark of 2020 and we should expect demand to be more muted. This should not come as a surprise and the deterioration in 2021 should not be taken as failure but, rather, as a market correction. Proper analysis will compare 2021 with 2019 as well as with 2020.
That said, the tailwinds of 2020 will give way to some headwinds which are very unhelpful. Among them are a continued focus on price as the discount players (Aldi, Lidl, dollar stores) continue to expand. Higher costs from fulfilling more orders online. Investment requirements in infrastructure to adjust businesses as consumer habits shift. And overhead increases from higher energy costs and potential minimum wage hikes. Some of these things might be offset by mild inflation, but given the competition in grocery the scope to hike prices is minimal.
This all adds up to margin compression and, in my view, it will ultimately drive some consolidation in the sector.
As one of my clients pointed out 2020 was, along with everything else, a rush in retail innovation. It was the only way to survive. And, particularly for grocers, it was overdue.
Now, do I expect them to exceed their sales from the height of the pandemic? Probably not, especially not during the first rush of vaccinations. I know I’ve eaten in restaurants about six times since my vaccination took hold on February 14. But I can’t do it forever. I’m tired of it already.
So grocers will have a dip in sales once mass vaccinations have occurred, but I believe many of those sales will return. And grocers now have the technologies, processes and experiences to support any kind of selling. This is no small thing.
I’ve said before, I believe grocery delivery (and BOPIS as well) is addictive. Now they’re ready to meet that request profitably.
I think many received a shock to the system, but I’m not yet convinced all of them are “ready.” Amazon still hasn’t scaled Fresh, Walmart is just starting to experiment with MFC, and Kroger is beginning to roll out Ocado. I’m interested to see how Ocado/Kroger vs. Walmart plays out.
Walmart wins.
All signs point to a growth slowdown, but that doesn’t mean it’s going to stop dead in its tracks. Pushing variety will help a lot. One of the downsides from buying from stores that specialize in large size/bulk purchasing is that you reduce variety at home. Grocery stores are well-positioned to take advantage of this – great stores will really push the idea that shoppers can have variety in their meals. And I don’t think the pressure is any greater from Costco, DG, Target, or Walmart – the latter has been a de facto grocery store for years now.
Grocers in 2021 are going to have a hard time comping against their extraordinary 2020 sales, but that doesn’t mean they aren’t long term winners due to the pandemic.
Pre-COVID-19, restaurants and grocery stores shared a 50/50 split of consumers calorie dollars. During COVID-19 grocers received as much as 75 percent of that budget, and for the entire year averaged better than 60 percent. As restaurants open back up, grocery stores will lose some of those gains, but I don’t think they are going to lose them all.
Many new cohorts of consumers learned to cook, took cooking lessons, discovered recipes, bought cookware, discovered that cooking was a better value, more healthy, etc. Some of that will stick. Furthermore those grocers will be competing against a weakened restaurant industry that will take many years to recover.
The other factor is that all grocery stores did not fare equally. Grocers that had invested in digital and omnichannel before the pandemic had a distinct advantage over those that didn’t, and grocery stores with a full assortment had a significant advantage over smaller assortment and specialty grocers as consumers consolidated trips. Most notably, large well-funded grocers took share from independent and regional grocers. Walmart/Kroger/Albertsons owned approximately 40 percent of the grocery market before COVID-19, they may end up with better than 60 percent share by the end of COVID-19.
There will be a moderate decline as people yearn to dine out. However the demand will level off at the six month mark. We must also consider that the pandemic has forced grocery chains to undertake new, customer-centered service initiatives and those will remain in place, to the delight of customers and to the benefit of the chains.
A slower rate of growth or even negative comps are not at all a rocky path when they are totally predictable and totally understandable. I think the challenge is recognizing and capitalizing on the new sticky behaviors the article mentions. How do grocers capitalize on this new found love for cooking and eating at home? Where is the opportunity to differentiate and build loyalty versus competing on price? What role can BOPIS and delivery play in cultivating loyalty? A huge lesson can be taken from Target, who focused on and invested in the customer several years ago. They lived with the knocks they received from Wall Street while building a totally customer-centric business. Grocers might want to take a lesson and live with some of the short term hits they will take from some analysts for slow or negative growth. New shopping and buying behaviors simply must be recognized and invested in.
I guess it depends on what you mean by conventional supermarkets. The shift to digital will continue but obviously the pace will slow compared to peak pandemic.
Consumer behavior doesn’t simply go back to the way it was before. Consumers got used to convenience, and many ordered online groceries for the first time ever. Grocers (including Instacart) got a lot of things wrong that they need to improve and transform in order to drive that next wave of digital adoption. The whole replacement item process is one such area. Grocers that continue investing and experimenting will be the long-term winners.
I do not see a rocky path ahead for grocery. This pandemic is not over! Online grocery will never return to pre-COVID-19 levels and is here to stay. The grocers who invest in Micro-Fulfillment Centers (MFCs) will reap the rewards over the long haul. Robotic picking can pick 20 times the speed of a person at a cost effective price and that ratio will just go up. With the price of this technology coming down and the cost of people going up, retailers need to move quickly before they lose the market to Amazon, Walmart, Kroger and Target who are already marching down this path.
The return to everyday spending is expected after the pandemic. It is not a loss to stop operating in high-stress stockpile emergency mode. Many grocery retailers have invested in innovative technology solutions during the pandemic that will continue to improve their in-store shopping experiences long past the pandemic. For example, reaching over 30 percent adoption, the most popular grocery technology investment during the pandemic is scan and go touch-free mobile checkout. Leading grocery retailers that have invested in scan-and-go mobile checkout include Fairway Market, Westside Market, McKeever Price Chopper, Big Y, Co-Opportunity, Mother’s Market, Hy-Vee, Walmart, Sam’s Club, Kroger, Wegman, H-E-B, AHOLD, Tesco, Waitrose. Making their in-store experience mobile-friendly is the best way to connect with their shoppers and help make the shopping experience stress-free and fun.
I stopped pandemic grocery shopping at least six months ago and returned to my normal in-store shopping habits. I wonder how many others did the same?
The challenge for grocers now is keeping shoppers engaged. Consumers who enjoy cooking at home are likely to continue but grocers will need to find new ways to keep them cooking.
All grocers have cooking videos and recipes online, but what about in-store? Bring back cooking demos when it’s safe, offer kits assembled in one bag at one price or merchandise components necessary to create an entire meal in one place, post recipes and ideas with QR codes in the meat and vegetables sections. When shoppers know a store will continue to offer fresh ideas that store remains top of mind.
2021 will be the year of negative comps for the retail food industry. While nothing can be done to change that, stores have an opportunity to reinvent how they go to market. Will they stick with the same old promo process, with more offers and limited-time sales and coupons, or will they really try to change the shopping experience to make it more seamless for shoppers?
Retailers should expect a reversion to the mean in terms of total at-home eating expenditures. But that doesn’t necessarily portend traditional grocers’ demise. They have learned a lot in a hurry about meeting shopper needs in online order and delivery during the pandemic. Let’s hope they use it to their advantage. It may be the thing that saves the good ones from Amazon.
Before the pandemic, the grocery industry was transforming to shift to meet rapidly changing consumer behaviors. While in a post-pandemic world consumers will have more food choices, grocery operations that have shifted to the digital-first, health-conscious, time-strapped consumer will be amongst the winners when the traffic shortfall begins.
We already saw at least 30 percent to 40 percent of the center store re-imagined and repurposed with additional perimeter services. These include increasing the organic fresh and perishables, prepared foods, groceraunts, cafes, financial and health services. Consumers have plenty of choices for commodity products and can order these on a subscription service basis.
While there will be a traffic shortfall, Whole Foods, Kroger, and all the independent grocers have to continue to drive technology, services, and product innovations to keep the customers returning and preserve their gross margins and revenue growth.
It’s interesting you mention Whole Foods, Brandon. Do you think Amazon has a vision for Whole Foods?
Hopefully, there is one Rick, beyond maintaining what they have today. Specifically, the entire salad bar and hot foods area are either vacant or they have stacked packaged goods there. Just think of the significant margin opportunities of leveraging that space for prepared foods, services, expanded sushi bars, cafes, etc.
Considering the changing consumer landscapes, I can’t imagine the salad bars and hot food bars returning to the pre-pandemic levels.
Wow, what a lesson learned over the last 12 months for grocers: hoarding pandemic customers, sales booming, product sell-outs, panic. Now the tsunami has passed and more normal times return. It means being a retailer again, figuring how to draw customer foot steps from competitors, how to “up” the average sales, and not getting depressed about sales comparisons of the pandemic versus today.
Now it is time for the merchants to make some great calls. The strategies we employed before the pandemic have now resurfaced again, and we must be our best in merchandising presentations, in-stocks positions and especially on the loyalty programs. We must make customers want to run to the store again, and make new customers demand to join the loyalty club. We’re back to real retail.
2021 will be a year of re-adjustment. A lot of retailers got into areas like BOPIS, curbside and delivery out of necessity and there was very little time to fine-tune or acclimate. I believe a lot of retailers earned the loyalty of current and new customers as many retailers went the extra mile to not only take care of their customers, but also help local restaurants stay in business by selling their meals when those restaurants were either closed or operating at a low occupancy due to COVID-19 rules. I can see things like live cooking classes and food samples coming back in a more buttoned down incarnation adhering to local COVID-19 rules.
I sincerely believe that the Street will see that 2021 comps against once-in-a-generation market conditions are not sustainable, and that positive overall growth is (what a concept!) a good thing. And while most grocers will certainly see a dip in growth, I do believe grocers have a lot of opportunities to exploit: a passion for cooking has been reignited for good; many people now working from home will increase lunch from home spending, and many people will be anxious to spend more time in stores sampling and experiencing the joy of food exploration. Savvy grocers will recognize these opportunities and capitalize on them in ways that go far beyond mere discounting.
In my opinion grocers will do better after the pandemic subsides than they were doing prior. We have become more comfortable with, and more accustomed to, eating more meals at home than we were before. We have saved money by eating in, even if we have had some meals delivered. I believe this trend will continue. I do think the restaurant industry will come back, but will level off after the initial surge of being 100 percent open.
Perhaps the greatest challenge to profitable growth lies with the wages of grocery workers. Mandated state minimum wage legislation will put additional pressure on the grocer’s bottom line and may have a trickle down effect on suppliers. In addition, some municipalities in California and Washington State have instituted legislation that mandates a hazardous duty payment of $5 per hour for front-line grocery workers. So even if the number of shoppers and visits does not change, the costs pressure will continue to escalate, negatively impacting the bottom line.
I’m tempted to say yes, but for much different reasons. If I confine myself just to pandemic-related questions I’d say “rocky path” is a bit of an overstatement. Some of the hoarding, sanitation-based purchases (wipes, etc.) may — and I do mean may — slow down and, as people start going back out to eat, grocery sales will take a hit. But some people will like cooking at home, so there will be some counterbalance here. The challenge going forward is the same as it was pre-COVID-19 – staying ahead of changing consumer demand patterns.
A return to “normal” sales growth following a surge caused by an outside force is not exactly a “slowdown.” It’s more like the end of a new beginning.
Grocers have enjoyed a year marked by intense e-commerce trial, larger baskets in stores, and incredible tolerance for delays, out-of-stocks and price fluctuations. This all happened *to* them, not because of innovative genius. Those circumstances cannot last, and retailers know it – even though many of them have more profits in their accounts than ever.
Grocery shopper habits have been disrupted. Many will continue to make part of their purchases online. Exactly what proportion will depend upon retailers’ service quality and competitive prices. That puts the equation for shopper loyalty in flux.
Cash-rich grocers face a mandate to invest vigorously and immediately in systems that enhance shopper experience and optimize operations. Waiting until things “calm down” is a bankrupt strategy (actually it’s already a little late for some).
Yes, a slowdown after the pandemic is likely. But at what rate will things slow down?
It is unlikely that society will jump immediately back to pre-pandemic habits. I hear from many people who have enjoyed some of their new approaches to life and are valuing eating out more as the luxury it used to be.
As a result, I don’t see a life-threatening slowdown in grocery — merely re-adjustment. Of course, the stock market isn’t always savvy to these subtleties, so retail stocks may suffer. But the store operations themselves will be fine.
While there may be a general slowdown, I believe that many people actually got used to creating nice meals at home and sharing time with family. They will continue to look for those grocers who offer outstanding fresh food and convenient meal options. Those grocers that were already doing that, and now have been able to improve shopping services, including delivery and curb-side pickup, will continue to thrive.
2021 will be a mixed year for grocers. As the industry starts to compare to the panic buying of March and April of 2020, analysts should be casting a longer comparison of several years in their analysis. The fact is that grocery has done much in the past year to foster greater loyalty with customers with their flexibility, better customer service, and convenient delivery options. But it is time to start working on a new playbook to reignite the excitement of the grocery store experience in-store. This means embracing and fully utilizing all of the technology tools adopted last year and remain relevant to consumers across digital touchpoints. It’s time to start to figure out how to best execute food and beverage demonstrations and maybe offer a barbecue lunch or dinner event on the weekend and bring new healthy and value-oriented meal solutions for consumers.
I see a period of adjustment by grocers in the New Normal. They will launch more promotions to cater to customers’ new shopping attitudes and buying habits. Sampling and demos of hot and wet products will take a while before returning, if ever. Salad bars will need safety protocols via robotic devices or servers wearing latex gloves. Online shopping and curbside pickup will retain their popularity that spiked during the height of the pandemic.
Food will always be essential, and grocers have come a long way in making shopping more convenient and engendering loyalty by their actions during the pandemic. While there will no doubt be pent-up demand for dining outside the home, grocers will have the opportunity to continue to retain shoppers with fresh assortments, meal-prep options and service in 2021 and beyond.
Patricia, I know you are in San Diego also. I witnessed my first product demonstration at the local La Jolla Ralphs last week and it was very popular. There seems to be some pent-up demand for some excitement and new items to test. I was so happy to see that demo because it meant one more little step back to normalcy.
Yes, sunny SD! My downtown Ralph’s has also has sampling. They have done a great job during the pandemic. I believe customers will be (more) loyal based on their performance during the pandemic!
Tailwinds will continue through 2021 into 2022, at which time there will be a new reckoning. This time it will be focused on grocery impact on the home. Despite a roaring back to QSRs and restaurants, consumers will continue to consume based on new work habits in the home. Groceries who’ve arranged pickup and delivery options will continue to see value going forward and there will also be a jump up in in-store sales as many customers revert to their weekly shopping routines. However, growth will slow. Challenges will be found in delivery (not new, but ongoing). The “essential” advantage grocers may have had will shift to a “can’t sit in my home” shopping advantage.
Conventional supermarkets had customers before the pandemic, they will have customers after the pandemic. For certain, there will be a deceleration as the world approaches whatever the new normal will be. However, I do agree with Muller that there will be some stickiness to behaviors developed during the pandemic that will benefit grocery stores. How long those new behaviors will stick around might depend on how flexible the new work week will be. More work from home days means more breakfast at home days that grocers should be prepared for.
As for challenges, grocers that have beefed up staffing to accommodate a pandemic-buying mindset from consumers may need to look at rebalancing staff as store shelves turn slower. This might present a good opportunity to organize around online grocery.
This is a fatalistic assumption that there will be a post pandemic slowdown. With the passage of the $1.9 trillion dollar spending bill, we can safely assume that consumers will be spending for some time to come. Add to this the concept that households need more storage of foods, and we will see an increase of food spending, not a slowdown.
Year over year sales will decline as people return to restaurants. The grocery stores that thrive in the future will be the ones that take the learnings from 2020 to develop experiences that customers choose which are achieved through the introduction of digital products.
For example, online shopping for groceries is here to stay. We may see advancements in this area with updates to how the produce is stored for pick-up, how it’s delivered, or even where it’s stored (micro-fulfillment centers), but now that people have seen how easy it is to use, I don’t see that going away anytime soon.