Changing consumer demographics have made health and wellness concerns – including the availability of natural and organic poultry and meat proteins – a crucible for success or failure in the retail distribution channel.

The power of these trends to reshape food marketing channels can be traced in a succession of mergers and acquisitions in the retail grocery business. Supermarket mergers and acquisitions are up in the last three years, even as the U.S. economy strengthened. The industry is consolidating in the strongest grocers with the ability to adapt to a changing consumer, who is focused on health and wellness.

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Supermarket mergers and acquisitions are up in the last three years, even as the U.S. economy strengthened.

While a less-than-robust U.S. economy and food price deflation are suppressing revenue growth in the retail grocery business, a major factor in the segment's consolidation involves having the business platforms and products to meet health and wellness demands.

Health and wellness is a powerful trend with consumers in food marketing and has come to mean a broad array of attributes including natural, organic and functional nutrition. Its aura extends to poultry and meat produced with animal wellbeing and sustainability in mind.

Grocery retailers (and poultry suppliers) are adapting to an older and more diverse consumer landscape – one exhibiting changing consumer tastes and preferences that are increasingly driven by youth. Satisfying these broad demands has proved to be a big challenge for grocers and is playing a role in the ongoing consolidation in the retail grocery business.

Health, wellness includes natural, organic poultry

The Food Institute webinar, “Who’s buying whom and what to expect in the future,” traced the impact of the disruptive forces driving consolidation and creating the need for new business strategies in the retail grocery sector. Forces driving retail grocery mergers and acquisitions include:

  • Grocery retailers and their suppliers must balance the needs of an older and more diverse consumer landscape, which features changing tastes and preferences driven by younger consumers.
  • Health and wellness consumer focus, which includes natural, organic and functional foods such as meat and poultry, is reshaping the retail grocery business.
  • Alternative retail grocery platforms, including Wal-Mart and specialty grocers, are experiencing retrenchment or slower sales growth.
  • An improved supply chain for natural and organic foods, including poultry and meat, helps retail grocers adapt to the health and wellness trend.

Conventional grocers adapt to health and wellness trends

The battle for dominance in the retail grocery segment hasn’t gone as predicted. Wal-Mart hasn’t conquered the retail grocery segment, as many observers had earlier predicted. Also, specialty grocers – not long ago the darlings of sales growth and margin – are seeing lower profitability. What’s more, some old-line conventional grocers have adjusted retail strategies and regained consumer relevance.

Michael Johns, BMO Capital Markets, said, “In the early 2000s, the disruptive factors included the entrance of Wal-Mart into food retailing and there was talk of how it would decimate the retail grocery industry.” Later, the disruption was from the “new, evolving formats of the specialty grocer and the talk was that the conventional retailers no longer had what consumers wanted. Today, the story is different; it is all about the traditional grocer having successfully adapted” to these changes.

“The demographic changes involve age and ethnic makeup of the U.S. consumer market as well as the focus on health and wellness,” Johns continued. “And almost everyone who is on their game is selling natural/organic or specialty products in their stores. Some retailers have private label products in these categories. Those are real changes that have taken share back from the Whole Foods of the world, for example.”

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Specialty grocers – not long ago the darlings of sales growth and margin – are seeing lower profitability. 

Kroger balances new and existing customer needs

Kroger is a standout among conventional grocers in successfully adapting to the changing demographics and health and wellness trends.

David Schoeder, The Food Partners, said, “Kroger’s performance confirms that adapting to today’s retail grocery environment requires balancing the needs of existing customers (who don’t necessarily want change) with the needs of customers who require new food products and will look elsewhere, if necessary, to get them.”

Conventional grocers recover sales growth

The changing competitive positions of the specialty, conventional and value grocery formats can be tracked in comparisons of their single-store sales growth (SSSG):

  • Specialty grocer SSSG at 1.5 percent for the last 12 months was down 4.9 percentage points from 2012.
  • Conventional grocer SSSG at 1.2 percent was up 1.0 percentage points from 2012.
  • Value grocer SSSG at 3.2 percent for the last 12 months is down 0.2 percentage points.

“While same store sales growth in the conventional grocery store is sluggish at 1.2 percent,” Johns said, “it is taking a lot from the specialty grocery which is down about 5 percent from three years ago. The 1 percent growth in conventional grocery store sales represents a great deal of sheer dollar volume,” Johns said.

“The greater the sales of on-trend items like organic food at conventional grocery stores, the less the need for customers to shop at the specialty grocery stores. That is starting to take a chunk of sales from the specialty grocers.

“The U.S. consumer is still focused on value. That has not changed. That is a proposition with which the shopper is in tune,” he concluded.

Specialty grocery valuations have fallen

Stock valuations of specialty grocers have fallen as conventional grocers have taken back market share.

Schoeder said, “Whole Foods is trading at 7.2 times cash flow, down 49 percent from last year. The specialty/natural formats are down 46.8 percent on average. Conventional stores like Kroger are becoming much more competitive in the natural/specialty space and taking business by providing competitively priced natural and organic products as part of its mix as consumers are gravitating to those products as part of their everyday life.”

Johns added, “The market has come to the realization that good management teams and good best-in-class grocery operations can adapt to consumer desires. Growth has declined in poorly managed specialty grocery stores and growth has increased in well-managed traditional grocery stores.”

No future in being in denial

Johns and Schoeder agreed that the consolidation in the retail grocery sector is not over and may even speed up when financial markets are more stable and favorable for public offerings of stock.

Retail grocers not making the necessary adjustments to meet consumer demand will only see their fortunes erode over time. Schoeder shared a quote with webinar participants: “Being in denial in the grocery business today is never left unpunished.”

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Consolidation in the retail grocery sector is not over and may even speed up when financial markets are more stable 

Consolidation of retail grocery to continue

There will be more consolidation in the retail grocery business, according to Schoeder.

“Fresh Markets is in play; the question is whether Kroger will add this format to its portfolio. The jury is still out as to whether a number of alternative formats will survive the test of time as mainline retailers become more competent. Albertsons will go public at some point and continue to be a consolidator.”

More bankruptcies are ahead in the retail grocery business. He told listeners, “Expect two to four bankruptcies in 2016. The number of supermarket bankruptcies has remained steady over the past several years. The number of bankruptcies reached a high of 14 in 2009 and has ranged from one to seven per year through 2015.”

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Consolidation in the food industry is expected to continue.

Business outlook for retail grocery business

The overall outlook, however, is positive for retailer grocers able to adapt to the changing business environment.

Johns summed up the outlook for the retail grocery business: “I think we are going to see near-term deflation in meat and produce prices, which is a bit of a headwind for grocers. But overall the story is of a tailwind in the form of inflation, which will help drive sales and allow retailers to take advantage of fixed cost structures. The global demand for protein is going only in one direction, which is up. We will see more weather disruptions which will cause volatility in pricing, which overall probably increases the prices of meat and produce.

“Looking forward, the industry tailwinds are stronger than the headwinds. The players that have survived the onslaught of Wal-Mart are that much stronger for it. They are able to compete and better communicate their message to the consumer. They are more nimble in adapting. Looking forward there is greater strength of the ability of these players to compete on the perishable departments and provide the consumer with the perception of value. It will be interesting to see how all this intersects with the online world that is coming,” he said.