business news in context, analysis with attitude

The Wall Street Journal this morning reports how how traditional supermarkets are being disrupted out of business.

An excerpt:

"Supermarkets and smaller-format grocers accounted for about 37% of Americans’ total food spending in 1997. As of 2022 that was down to about a quarter of the total, according to the U.S. Department of Agriculture. By contrast, warehouse clubs and supercenters such as Costco and Walmart increased their share of food spending from 4% in 1997 to 10%. Restaurants and fast-food restaurants, which accounted for 33.6% of households’ food budgets in 1997, now account for 37.4% of their food spending. Data from Nielsen’s NIQ shows that grocers (including supermarkets) and drugstores are the only two retail formats that lost food market share in the year ended May 2023 compared with the year-earlier period.

"Supermarkets’ share is most endangered in the so-called center aisle, where many competitors sell the same brands of toilet paper, cleaning materials and cereals, often at lower prices. They simply have more advantaged business models on those types of repeat purchases. Costco, for example, has a highly efficient operating model and leans on membership fees and sales volume rather than retail margins.

"Mass merchants such as Walmart and Target sell a mix of products—such as apparel and home products—with higher margins to compensate for low profits on consumables. Discount grocers, meanwhile, have smaller formats and a narrower selection of products, reducing overhead. And then there is the internet: It is difficult to beat the convenience of having repeat purchases delivered directly to consumers’ doorsteps."

Despite the fact that they are most endangered in center store, the Journal writes, "supermarkets have resisted reinventing their center aisle because they rely heavily on the money that national brands such as General Mills and J.M. Smucker pay them to promote their products, whether through in-store displays or coupons. So-called trade funding can account for more than a half of supermarkets’ operating profits, according to Matthew Hamory, partner at consulting firm AlixPartners. Relying on that source of profit could start to work against them. Manufacturers will naturally want to allocate more of those dollars to retailers growing the most sales volume, which recently have been big-box mass merchants like Walmart and warehouse clubs like Costco, according to Scott Mushkin, chief executive of industry research firm at R5 Capital."

KC's View:

Let's be clear.  Glen Terbeek was talking and writing about this decades ago, especially the fact that supermarkets' reliance on promotional dollars could corrupt them out of business.

If traditional grocery stores don't survive, it will be self-inflicted, because they haven't differentiated themselves successfully enough.