Industry Profiles: Food Stores

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Industry Profiles: Food Stores

Overview

Food retailing in the United States is dominated by supermarkets, which account for the majority of U.S. retail food sales. Among supermarkets, a handful of large multibillion-dollar chains lead the industry. Together, all U.S. food stores had annual sales of more than $442 billion in the early 2000s. In addition to supermarkets, grocery stores, and convenience stores, which together account for 96 percent of sales, the food stores category also includes specialty food stores, fish and seafood markets, fruit and vegetable markets, meat markets, and stores selling confectionaries, nuts, and baked goods. Although they sell some food products, health food stores—which may sell vitamins, nutritional supplements, and foods with other health benefits—are considered to be part of the health and personal care store category, which also includes pharmacies and drug stores.

During the late 1990s and early 2000s, the food retail industry was marked by consolidation, as large supermarket chains acquired smaller competitors in order to survive increasingly stiff competition from the likes of Wal-Mart Stores, Inc. By the early 2000s, Wal-Mart had risen to the top of the industry, establishing itself as the grocery industry's market leader. This environment made it extremely difficult for even the very best independent grocery chains to survive. Thus, a relatively small percent of all U.S. food retail outlets generate the majority of the industry's sales.

Supermarkets are distinguished from grocery stores and other kinds of retailers based on the size and scope of their offerings. A standard measure in the industry is whether a store has an annual sales volume greater than $1 million. Others define supermarkets as having more than a certain amount of square footage. Selection of merchandise is also key, as supermarkets normally stock a full line of groceries that includes dry and canned goods, fresh meats and vegetables, frozen items, and basic non-food items like paper goods and cleaning supplies. While conventional grocery stores may only stock some of these products, many of the largest supermarkets go further to offer such amenities as deli counters, bakeries, florists, bank branches, and video rental shops. In fact, an important trend that began in the mid to late 1990s and continued into the early 2000s was toward large integrated supermarkets—sometimes called hypermarkets—that featured extensive lines of both food and nonfood merchandise to eliminate shoppers' needs to visit multiple stores.

An important player in the field of large-scale food and nonfood retailing is Wal-Mart Stores, Inc., the nation's leading grocer. By the early 2000s, the company had opened more than 1,000 "supercenters," which, in addition to offering discount general merchandise, include full-line grocery departments. In addition to its line of supercenters, Wal-Mart also was expanding its chain of smaller Neighborhood Market grocery stores in select areas. Wal-Mart's foray into food retailing has created a new competitive environment for supermarkets. Ironically, the retailer's success in capturing a significant share of conventional supermarkets' business (approximately 16 percent in 2002) mirrors the method by which supermarkets eroded the market share of traditional local grocers: offering greater selection than competitors while keeping prices low.


History of the Industry

Characterized by carrying a large variety of different food stuffs, dry goods, and health and beauty products under one roof, supermarkets developed in the early 1930s. The expansion of their stock beyond essential food items was encouraged by rising operating costs, particularly rent and wages, influenced by government regulation and union bargaining. Prior to this, food was sold through local "mom and pop" grocery stores and chain "economy stores." Faced with competition from supermarkets that undercut them by as much as a third or a half, the old style grocery store chains either converted to supermarkets, were bought out, or went out of business.

Supermarkets provided consumers with lower-priced goods during the Depression. Concentrating less on personalized service and more on bare bones cash and carry, supermarkets emphasized the utilitarian aspects of the business and let the customer do the work of selecting and handling goods. With their emphasis on high stock turnover, supermarkets benefited from the new tendency toward bulk buying, supported by the growing use of refrigeration and the proliferation of cars. The growth of automobile traffic also influenced store location, with placement for traffic convenience becoming a primary concern.

From 1930 to 1950, the industry witnessed radical and far-reaching changes in methods of food distribution. Noticeable changes included increased self-service, the wide expansion of lines, and the great increase in the number and size of stores. Consequently, consumers benefited from greater choice and convenience. Through creative marketing techniques and low competitive prices, supermarket chains, both independently affiliated and corporate, had established themselves as the leading outlet for retail food distribution by World War II.

After 1950, increased competition fostered further developments in the retail food business. The large profit margins that stores had been able to realize were under-cut as supermarkets found it necessary to increase print and television advertising and initiate such promotional efforts as trading stamps, games, and contests to win business. These efforts succeeded only in pushing up supermarkets' overhead faster than they could increase gross margins. These percentages narrowed consistently throughout the 1950s and 1960s. By 1954, the United States had 288,000 grocery stores, almost 100,000 fewer than in 1948.

By 1965, supermarkets had won a 71 percent share of all retail food sales, with superettes (stores having annual sales between $150,000 and $500,000 a year) accounting for 13 percent and small stores (sales less than $150,000 annually), 16 percent. It had become evident by the 1960s that an integrated chain of self-service supermarkets could offer consumers a better deal due to their economies of scale. It was also clear, however, that cutthroat competition, which forced chains to keep their price margins low, was wiping out some of these economies.

Supermarkets sought ways to cut their costs even further and found inspiration in the new soft goods discount stores that were starting to appear. These businesses applied the same techniques pioneered by supermarkets to create low-price department stores. Supermarket managers subsequently decided to employ the discount idea in their own businesses. This necessitated abandoning their previous promotional schemes and focusing on price-cutting. For consumers, the appeal was immediate, and discount pricing spread throughout the industry.

While the industry was undergoing these transformations, many supermarkets simultaneously endeavored to raise their profit margins by expanding their stock to include more general merchandise. Others bought out existing discount department stores and opened the two kinds of stores side by side or under one roof in strategically located shopping centers. Another development was the trend for supermarkets to ally themselves with discount drug stores.

The net effect of these changes was a gradual decline in the number of general food stores—although the food retailing market saw some increase in the number of specialty stores. The 1972 census recorded 194,000 supermarkets, with sales per establishment more than seven times greater than in 1948. By 1996, the number of grocery stores had fallen to 130,000, but sales had grown upwards of $400 billion.


Significant Events Affecting the Industry

One of the most important developments of the 1990s was the trend among the large supermarket chains toward converting to large-format stores. These stores, some spanning 65,000 square feet or more, focused on providing a more diverse range of products and services than did smaller outlets. Many featured in-store delis, salad bars, and bakeries, and beginning in the late 1990s, they were beginning to offer prepared meals to further allure shoppers with convenience. The so-called home meal replacements, which were either ready-to-heat, store-cooked meals or foods that were kept warm in the store, represented an important growth category for the industry. As U.S. consumers increasingly sought convenience when purchasing foods, grocery stores had been gradually losing their share of consumers' food dollars to restaurants. Innovations like freshly cooked meals in stores were touted as possible weapons against further erosion of food stores' market share.

Related to the preference for large-format stores was Wal-Mart's mid-1990s entry into the food retailing arena. Wal-Mart had long marketed a small line of shelf-stable foods like potato chips and soft drinks, but in the mid to late 1990s, it announced a major new initiative to begin offering in some of its stores an extensive line of foods comparable in breadth to that of any major supermarket. A similar effort was underway at Wal-Mart's faded rival, Kmart Corporation, which was trying to repair its sinking retail empire. Wal-Mart was noted for its aggressive expansion in the general merchandise sector, which propelled it to become the United States' largest company by annual sales by 2002. Towering at four times the annual sales of Kroger, the largest conventional supermarket chain, Wal-Mart's arrival on the food retail scene significantly increased competition within the industry by the early 2000s.


Key Competitors

Although Wal-Mart was the nation's leading grocer by food sales ($80 billion in 2001), the Kroger Company was the United States' largest "pure-play" food store chain in the early 2000s, with 2002 revenues of $50.1 billion. With about 3,600 retail locations across the United States in 2002, the Ohio-based Kroger Company operated under a variety of brand names. In addition to Kroger stores, the company operates supermarkets under other brand names including Ralph's, Dillon's, Smith's, Pay Less, Baker's, King Soopers, Hilander, Owen's, Fry's Food, QFC, City Market, Jay C, Cala Foods/Bell Markets, Kessel, and Gerbes. In addition, Kroger also operates: multi-department stores called Fry's Marketplace and Fred Meyer; a variety of convenience stores including Tom Thumb, Loaf 'N Jug, Quik Stop, Kwik Shop, and Turkey Hill; and warehouse stores Food 4 Less and Foods Company.

Boise, Idaho-based Albertson's, Inc. was second in the grocery industry behind Kroger. In 1998, the company took center stage in the industry when it announced the purchase of its rival American Stores for $11.7 billion. Albertson's, ranked fourth before the acquisition, was slightly smaller than third-ranked American Stores but in better fiscal shape. By the early 2000s, Albertson's operated 2,400 stores, including both supermarkets and drug stores, under a variety of different brand names including Albertson's, Jewel, Acme Markets, and Osco Drug. The company posted sales of $38.0 billion in 2002, at which time it employed 222,000 workers.

Safeway, Inc. was another leading U.S. food retailer, with 2001 sales of $34.3 billion. The company operates from about 1,770 retail locations and has a strong presence in many regions of the United States. Safeway also wields an extensive line of private-label products, many of which it manufactures itself.

General Nutrition Companies, Inc. operates the United States' largest specialty food retail network through its 5,300 outlets, many of which occupy small storefronts in shopping malls. The company, owned by Dutch firm Royal Numico since 1999, realized $1.4 billion in 2001 sales, up slightly from 2000. The stores feature vitamins and mineral supplements, nutritional and dietary supplements, healthy foods, and fitness merchandise.


Industry Projections

New stores are often the focal point of a growing retail business, and this is no exception in food retailing. Many leading companies, including Kroger, Albertson's, and Wal-Mart, have stated goals for new store openings. However, some of these openings are always offset by closures, because stores seek to maximize profitability of every location. For example, although Albertson's was adding new stores in several cities in Arizona and Nevada, in 2002 the company also announced that it was planning to close 116 under-performing locations in Texas and Tennessee. Thus it's common for a store to close several outlets while building dozens more.

Because net demand for the bulk of the industry's products—groceries—is growing much more slowly than companies would like, they have been forced to compete for customer loyalty. In the early 2000s, food retailers were expected to continue enticing consumers by adding more in-store amenities and wider selections of merchandise in order to gain and maintain market share. In many ways, this was changing the very face of food retailers, as they began to offer an increasing array of non-traditional products and services to compete with the likes of Wal-Mart. As C.L. King Associates' Gary Giblen said in Supermarket News, the blending of distribution channels "will continue as supermarkets try to sell more pharmacy items, drug stores try to sell more food, convenience stores try to sell more fresh merchandise, and Wal-Mart tries to sell more of everything, including food."


Global Presence

The food retailing industry, like many retail segments, is largely confined within U.S. borders. However, a few of the largest players, including Safeway and Kroger, have stores in Canada and Mexico. Perhaps signaling the industry's future direction, Wal-Mart has increased its international presence significantly since the late 1990s. The retailer nearly doubled its lineup of international stores from 314 in 1997 to 601 in 1998. Since then, Wal-Mart continued to grow globally, and by 2002, operated 1,170 stores outside of the United States.


Employment in the Industry

Food retailing employs a massive labor force of more than 3.5 million people, but at $9.61 per hour the industry's average wage lags behind the U.S. average full-time hourly wage. In addition to receiving low pay, female workers in the industry have reportedly suffered from sex discrimination by their employers, as a number of class-action lawsuits were filed against major retailers during the mid-1990s.


Sources for Further Study

"against a wal-." progressive grocer, september 2001.

mcnair, malcolm p. and eleanor g. may. the evolution of retail institutions in the united states. cambridge, ma: marketing science institute, 1976.

"occupational employment statistics." bureau of labor statistics, u.s. department of labor, 24 may 2002. available at http://www.bls.gov.

peak, hugh s. supermarket merchandizing and management, new york: prentice hall, 1977.

standard & poor's industry surveys. new york: standard & poor's corporation, 1996.

supermarket news, weekly.

u.s. bureau of the census. annual retail trade survey. washington, dc: annual.

u.s. department of commerce, economics and statistics administration, u.s. census bureau. annual benchmark report for retail trade and food services: january 1992 through march 2002. washington, may 2002.

"wal-mart is eating everybody's lunch." business week, 15 april 2002.

zwiebach, elliot. "super surge; wal-mart supercenters leap to the top of the sn top 75 this year as consolidation puts pressure on medium and small-sized retailers and supermarkets diversify their businesses." supermarket news, 15 january 2001.

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Industry Profiles: Food Stores