Egg prices aren’t the only thing grocers are controlling these days
During the pandemic, consumers have returned to prioritizing need-based consumption. Outages, work-from-home and supply chain shortages have changed buying patterns and forced rapid transformation across all retail sectors. Brick-and-mortar stores have had to account for record high demand for online shopping, pick-up-in-store (BOPIS), low-contact transactions, and website engagement. Grocers, once primarily needing product selection, freshness and promotion solutions, now need to offer safe, clean, contactless shopping and home delivery options.
Fast-forward to the post-pandemic period, and we’ll see the grocery consumer continue to adopt some acquired behaviors, such as at-home meal options, digital services, and on-demand delivery. These, in addition to new demands for value, convenience and quality, have revealed the need for food manufacturers to continue to transform their operations and customer experience. Unlike their branded counterparts in the fashion industry, grocers operate on low single-digit profit margins and deal in perishable goods that require supply chain and inventory management.
Given the complexity of the food industry, it’s hard to pin down the top three industry pain points, but there’s one common thread among grocers that indicates inventory levels, cutbacks and brand differentiation are at the top of their list.
Stock levels are critical to profitability. Focusing on what products should always be on the shelf and at the optimal price point is a relatively small percentage of products that generate the majority of sales (such as milk, bread, butter, etc.). for income. This means that in order to increase productivity, food products must meet customer expectations in the dynamic retail space, while increasing operational efficiency and reducing attrition.
Mix in the current need to differentiate themselves from emerging new options, and food manufacturers are considering a new level of investment to scale and transform their brands to achieve long-term viability and profitability. While companies like Target and Walmart can shuffle their margins to compensate for their grocery divisions (Target does $20 billion in groceries each year, but grocery makes up only 20 percent of its merchandise mix), single-target supermarkets must be more surgical in their investments. . room for error. This leads to a discussion of the key trends driving the industry to the top of the list, with inflation and price volatility further squeezing margins:
- Inflation
- Digital addition
- Ready meals
- Health and sustainability
- Competitive positioning/customer experience
Let’s start with inflation, aka, the price of milk and eggs. 75 percent of consumers believe the US economy will be in trouble through 2023. It encourages a sense of caution and sensitivity to values. Food manufacturers are re-evaluating their legacy systems in search of efficiencies to offset margin pressure. Analytics, inventory management, turnover management and price optimization are important parts of a systematic approach to running a food business. In turn, reducing costs and increasing gross margin is the flip side of this model. Grocers should prioritize private label offerings as they can fill a value gap for shoppers and protect margin percentages. Kirkland Products has a proven track record of providing good, better, best brand alternatives that enable high private label penetration at cost effective and often quality selections.
The food industry is not immune to digitization and changing consumer buying patterns/behaviors. The pandemic has forced a rapid acceleration in the digital world for food producers who have mastered the in-store experience (bakeries, flower and wine boutiques, seasonal covers, high-margin/CPG paid shelf placement, specialty stations, smart labels, shelf pricing and even self). -checkouts), but lagged significantly behind e-commerce and mobile apps (which grew 12 percent year-over-year).
In addition to online shopping trends, grocery stores are leading the post-pandemic continuation of food-at-home/delivery (FOH), up 8.7 percent year-over-year. Consumers are now accustomed to having their groceries delivered to their doorstep (the milkman is back). However, home delivery is expensive and low single-digit profit margins are straining on all fronts. Costs, along with manpower, speed requirements, and scheduling preferences, increase operational complexity and revenue strains. Home delivery may be here, but the food industry needs a better solution to accommodate shoppers. Drones? Driverless cars? Third party apps? Regional receiving stations? In the future.
Another trend that isn’t helping with rising costs is the desire for healthier food options and increasing demands for sustainability. According to Precedence Research, the organic food market is projected to grow at a CAGR of 12 percent over the next eight years and has already experienced double-digit YOY growth. Local growers, regionalized supply chains, fresh food options, and low/no preservative options put additional pressure on shelf life and product turnover. National supplier management is one level of operations, but farm-to-table/shelf management is more detailed and less scalable (ie, more expensive). Level up on sustainability pressures with reduced carbon footprints, fair farming practices, partner verification and packaging requirements, and much more on grocery stores’ plates (pun intended).
Another trend dominating the food industry is the rise of prepared meals and meal kits. According to Fortune Business Insights, prepared foods will grow 6 percent to $147 billion in sales in the U.S. alone (2021). With constant time pressures and the availability of affordable convenience, home cooks are looking for more options and alternatives in this segment beyond Costco’s $5 baked chickens. What was created by the time constraints and latch kids of the dual income household has now become the new requirement even among the home-based segment.
However, if grocers find it difficult to provide fresh food to consumers at competitive prices, can they compete in getting freshly prepared, hot/reheated foods to those same consumers and still make a profit? Again, the in-store experience of prepared foods has been a collective win for supermarkets and shoppers as they expand salad bars, food stations, and prepared and catered departments—as long as customers come to them, that is. easier to manage. Now, grocers must coordinate online shopping, in-store fulfillment, digital ordering and scheduling, and home delivery into the mix. This void in the market has given rise to new competitors such as Daily Harvest, Home Chef, Hello Fresh, Hungry Root, Sprinly and others.
One of the top trends is competition, differentiation and branding. Local grocers had almost proprietary markets defined by distance to and from the communities they served. National brands (Kroger, Wegmans) and international players (Lidl, Aldi) but also curating/special regional brands like Trader Joe’s and Sprouts are making inroads into local markets. Add mass retailers like Costco and hybrid retailers like Walmart/Target, and an entire technology-enabled segment like Amazon.com (Whole Foods) and home food delivery (see above), and supermarkets need even more differentiation.
Grocers must determine where to play and compete to create the right customer experience and meet consumer expectations and demand. Are they low cost services? Selective, high-price-high service? Large selection or boutique? Many supermarkets have never thought about identity or branding before, but pioneers like Trader Joe’s, known for its Hawaiian shirts, humorous marketing and private label and high-quality brands, and Whole Foods, known for fresh, healthy, aspirational products, are redefining. space.
So, still wondering about the cost of eggs alone? Doubtful. While the food industry faces many challenges, it also has tremendous opportunities and innovations on the horizon. The good news is that food is a necessary purchase and is virtually the only universal industry that supplies 100 percent of the global market. This is an exciting sector, with skilled experts able to assess and assist with transformation and the emergence of new technologies, including cloud-based AI/ML and the metaverse.
Phillip Brown is a partner at Columbus Consulting and a recognized expert in food processes and systems.