THE CHANGING RETAIL LANDSCAPE
Knowing where both the local independent and global grocery retailers are headed may better prepare local residents for future developments and inform the planning phase for alternative or independent grocery businesses that can fill the grocery gap in Peoria’s underserved neighborhoods. A review of additional market analyses was performed to highlight the major factors driving industry changes and to better understand where the industry is headed.
Rapid Changes to the Global Grocery Industry
The retail grocery industry is rapidly changing at the national and global scale. The disruption caused by e-commerce corporations such as Amazon; a proliferation of technologies to streamline and enhance the customer shopping experience; and growing competition from discount stores are leading drivers of the increase in competition and slimming of profit margins throughout the industry.
Following a decade of growth that resulted in an overabundance of grocery retail space, mainstream grocery retailers have slowed openings in the face of an increasingly saturated market. And although the grocery industry has continued to grow, US grocery sales have recently been in decline.
At the same time that mainstream supermarkets are dealing with an overcapacity of retail space, discount stores (such as Aldi and Dollar General) continue to expand. The chart below illustrates the impact of more retailers pursuing opportunities in grocery sales - revenues have been further fragmented. The addition of discount grocers continue to drive prices down while at the same time raising the expectation for cheaper food products by consumers.
Caption: The spreading of revenues throughout a growing grocery industry
A report by McKinsey & Company predicts that by 2026, massive shifts in revenues to new channels could drastically alter the grocery retail landscape:
“much of the $5.7 trillion global grocery industry is in trouble. Although it has grown at about 4.5 percent annually over the past decade, that growth has been highly uneven—and has masked deeper problems….And it could get much worse. If grocers don’t act, they’ll be letting $200 billion to $700 billion in revenues shift to discount, online, and non grocery channels. Monumental forces are disrupting the industry….When the dust clears, half of traditional grocery retailers may not be around.”
This report goes on to attribute the industry disruption to: changing consumer habits and preferences; aggressive competitors and the emergence of alternative sales channels; and the emergence of new technologies.
This report—similar to many others like it—outlines six critical areas of focus for grocers to remain competitive in the future food retail marketplace. These focus areas should be considered locally to better understand the reasoning behind the decisions of global companies such as Kroger. Our region’s independent grocers should also consider these factors to improve their own business models and remain locally competitive:
Define a distinctive value proposition: Convenience, inspiration, value for money
Shape your ecosystem—and either go big or get out
Put technology to work in every part of the value chain
Win back lunch and dinner
Rethink all of your real estate
Innovate ten times faster
As ongoing reports and analyses continue to support claims such as those made in the McKinsey report, mainstream grocers such as Kroger appear to be taking notice—and taking action. For instance, Kroger states in their Restock Kroger corporate strategy:
Kroger will reallocate significantly more of the capital that has been traditionally ear-marked for brick and mortar projects to fund technology and infrastructure upgrades and to create alternative revenue streams.
In general, the closures in the Peoria area may fall into this overall strategy for Kroger and other major grocery retailers as they retool their real estate footprint and direct more resources to catch up and keep pace technologically and logistically. Although Kroger closed 40 stores nationwide throughout the same fiscal year as the Peoria-area closures, their FY2017 shareholder report shows that they also opened 42 new or relocated stores.
Kroger is also putting focus into attracting customers with greater purchasing power by increasing organic offerings and expanding into affluent markets in cities such as Baltimore and Washington D.C. In FY 2017, Kroger closed 40 stores nationwide.
At the time of the Peoria-area closures, Kroger officially stated that poor financial performance at the stores forced the decision. In an attempt to understand what constitutes poor performance, real estate maneuverings and an increasing focus on more affluent customers should be considered when analyzing the Peoria-area grocery closures and when considering the future prospects mainstream grocery retailers choosing to locate their traditional store models in low-income neighborhoods. This is especially important to our region’s economic development departments when choosing where to place retail business attraction energy and resources.
While the largest retailers rethink their strategies, the discount stores continue to expand and increase their influence on the grocery market:
This no-frills, bargain-hunters' paradise is growing at a level that is largely "unthinkable" in retail, Credit Suisse analysts wrote in June. In 2017, Dollar General opened new locations at a rate of around four stores a day. In 2018, it opened 900 stores, and in 2019, it plans to open 975 more.
-Business Insider, March 2019
The same report also shows that although the majority of Dollar General stores do not currently carry fresh food, their interest in expanding these offerings continues to grow as they look to better compete with Walmart for mid-week shopping. This interest is encouraged by a significant increase in sales at their 300 stores that currently carry fresh produce. Dollar General also continues to dominate in rural and low-income suburban areas that are often considered food deserts. This gives additional incentive to consider more fresh food offerings and take advantage of the gap in access.
In fact, in March of 2019, Dollar General announced a rapid expansion of their fresh produce program, as well as a new streamlined self-checkout program, in their report to shareholders:
Looking ahead to 2019, we are excited to introduce two new transformational strategic initiatives, DG Fresh and Fast Track. DG Fresh, which is designed to enable self-distribution of fresh and frozen products, is already up and running in approximately 300 stores and Fast Track, which we believe will enhance in-store labor productivity and customer convenience, is launching soon.
Their 2019 goal is to expand DG Fresh program to over 5,000 stores and further invest in refrigeration in both their distribution centers and stores. The expansion of Dollar General into fresh foods should be of particular interest to Peoria-area independent grocers given the potential for disruption to their revenues. Further analysis is needed to know how many of the Dollar General locations in the region are included in the 2019 scale-up.
Additionally, Hy-Vee and Amazon both have launched small store models which they intend to replicate. Hy-Vee has modeled their Fast & Fresh concept—launched at the end of 2018 in Davenport, IA—after a convenient store, offering prepared foods, gasoline, and Starbucks coffee in addition to fresh groceries. Amazon, also in an attempt to compete with Walmart, is retooling the Whole Foods 365 stores as discount grocery stores. They are also exploring rural locations that may double as both grocery stores and distribution centers. Both of these models and more should be furthered explored for their potential location in underserved Peoria-area neighborhoods.
Given the rapid changes throughout the global grocery industry due to relentless disruptions to the traditional model, community members and business leaders interested in filling the fresh grocery gap in underserved neighborhoods need to focus on the industry’s leading edge to either attract newly available grocery store models and/or develop independent businesses able to withstand this growing competition.
A View of the Local Landscape Through Conversations
A series of interviews with area grocery store managers reminded us that shifts in the grocery retail market have been occurring on a number of fronts—and for existing stores the changes have been continuous. These conversations highlighted the importance of recognizing that changes in the marketplace are not limited to the 2018 Kroger closures. It also revealed how some of the previously discussed national and global pressures are felt locally.
Below are quotes that highlight the recurring themes raised by the grocery store managers in the interviews conducted during the Fall of 2018. The stores were a mix of local independents and national chains, but they shared many sentiments concerning both their challenges and opportunities.
It’s not just about the numbers
We heard repeatedly from the managers that we spoke with about the importance of creating community - with this culture of community connectivity comes customer loyalty to the store that is reciprocal for organizations - everyone working for the benefit of the whole contributing to scouts, fire department etc. Building community is a continuous practice - actively engaged, listening and making the store's presence felt in all aspects of the community government, neighborhood, and organizations.
Location is as critical to small independent grocers as to the national chains
Every manager interview discussed the importance of store location and surrounding amenities and neighborhood features as part of their business success. Nice location, everything that is going on around this store is contributing to their success. When vacancies occur, it creates a good deal of concern for other retail outlets. They love the location, as it is favorite type of store walkable neighborhood, for shopping and also jobs.
While location is very important to the stores success it’s also critical to recognize that customers are from everywhere, pulling mostly from an area within a 30-45 minute drive. However, some big box stores indicated a pull from up to half an hour driving distance. It is this expanded population base that is helping to shape this shifting grocer retail landscape.
Managers stressed the importance of workforce care.
They recognize the value and importance of jobs to youth and families. As many youth are helping with expenses at home, they want to make people's lives better. Investing in training will provide greater opportunities for their employees as well as support sales growth. There is a great deal of strength and talent in our grocery retail community, as most all of the businesses interviewed had more than 5 years business experiences and several of the small grocers were generational businesses.
Empathy For Struggling Families
Managers were all quite empathic to individuals situations as they believes that a lot of theft is hungry people and work closely with social service agencies to see that families get the assistance they need. Some stores have added very affordable bundles that help to make the food dollars go farther.
SNAP & WIC Widely Accepted but Adds Challenges for Grocers
All of the managers interviewed accepted Supplemental Nutrition Assistance Program (SNAP) and other forms of public assistance the percentage of customer base utilizing food assistance programs ranged from 5% to 20%, with the majority of respondents indicating between 0 and 10% of customers. Of concern is the monthly disbursement of food stamp dollars - for the two weeks surrounding the issuance of food stamps they increase stock and staffing significantly, in the remaining two weeks or end of the month they cut back in staffing and stock orders, when there is a 5th week in a month is really difficult for families and retail alike.
Food assistance support provided by Women Infants, and Children - known as WIC presents much greater challenges for store managers and some stores have stopped working with the program because they were not always able to meet the reimbursement requirements with such strict product requirements and constant changes in product packaging.
Following a low risk model - fewer options to steal causes managers to avoid high theft items are health/beauty, liquor, cigarettes, and formula. Conditions of unemployment, poor housing, education levels are all contributing to issues of theft. Often surprised by what they steal, there is good police support but they do not often catch theft.
Some of the larger stores interviewed emphasized the current or future projects to fund technology and infrastructure upgrades and to create alternative revenue streams with online shopping. Only a couple of the managers interviewed indicated online shopping as a significant portion of their store’s revenue. Current national data indicates that online grocery store shopping amounts to roughly 8% of grocery purchases in the US.
Constantly Changing Grocery Landscape in Greater Peoria Region
2018 - July, Fresh Market in West Lake Shopping Plaza Closed
2018 - January, Harmon Highway, and Wisconsin Avenue Kroger Stores Close
2017 - Target in Glen Hollow $5 million Renovation and Expansion of Grocery
2017 - June - Aldi Stores Announce Multi Million Dollar Renovations ($8M through 8 area stores)
2016 - December - Dollar General 137 S Western
2016- January - Dollar General 4015 SW Adams
2015 - August - Grand Prairie Hy Vee
2015 - November - Family Dollar 600 S Western
2013 - March - Target opens in the Levee District, East Peoria
2013 - August - Aldi Stores Announced relocation plans in East Peoria
2012 - September - Costco opens in Levee District, East Peoria
2010 - August - Fresh Market in West Lake Shopping Plaza Opened
2008 - July - HyVee announced plans for the purchase of building in Sheridan Village