Guarding the Perimeter: PG's 2017 Consumer Expenditure Study

The earth shook as Progressive Grocer was putting the finishing touches on this, its 70th Annual Consumer Expenditures Study. Those shock waves were caused, of course, by the announcement of e-tailing giant Amazon.com’s planned $13.7 billion acquisition of Austin, Texas-based supermarket chain Whole Foods Market, viewed by most analysts as the last piece of the puzzle for Amazon to conquer the grocery world.

To be sure, the move was the latest and most significant in a series of wake-up calls for traditional grocers in their quest to keep up with a rapidly changing consumer base motivated by need-based shopping and a desire for both customization and convenience.

But the deal is also an admission by Seattle-based Amazon that the future isn’t pure e-tail, but rather a truly omnichannel experience in which brick-and-mortar stores will still play a significant role, although one far removed from tradition.

While online sales of center store foodstuffs and general merchandise continue to erode those made in the physical store, opportunities for growth abound in fresh and prepared foods, as well a chance for grocery retailers to provide interactive culinary experiences, food and wellness education, and even entertainment.

In the past year, supermarkets lost another 0.1 percent of their share of sales to supercenters, according to the results of this year’s study, as total sales of fresh, center store and nonfood grocery products in 2016 rose to nearly $2.15 trillion. That’s an increase of barely half a percentage point, after a year plagued by deflation, shifting consumer preferences and ongoing economic uncertainty.

The two former factors, along with this year’s Easter shift to Q2, are blamed for the beating that traditional retailers took in the first quarter of 2017. Belying the cautious optimism for the current year that retailers once again expressed to PG in its annual report this past April, sales of fast-moving consumer goods (FMCG, including food and beverage) were nearly $3 billion lower than they were in the first quarter of 2016, according to Schaumburg, Ill.-based Nielsen.

But easing deflation, improving employment rates, rising average incomes and steadily increasing consumer confidence bode well for the months ahead.

Accelerating Change

The other milestone in recent weeks, effectively upstaged by the Amazon-Whole Foods announcement, was the first wave of store openings by German hard-discounter Lidl.

Early reports from its first nine stores to open in June in already highly competitive markets in the Carolinas and Virginia indicate huge crowds and a constant flow of shoppers eager to partake of lowball pricing on a limited assortment of mostly private label grocery items at stores that could be described as upscale versions of Aldi, Lidl’s top overseas competitor that has been in the United States for four decades and is currently experiencing its own growth spurt.

There has been significant growth in limited-assortment retailers — Aldi has plans to open up to 900 new stores in the next five years, while Lidl is charting a cross-country course — putting additional pressure on traditional grocers already squeezed by deflation. But it’s not just about price, according to Rob Hill, EVP of retail for Nielsen.

“It’s about value,” Hill, a former Aldi executive, told PG at Nielsen’s recent CoNEXTions conference in Los Angeles. “Both [Aldi and Lidl] have very clear value statements. “Everybody thinks Aldi is just about price. They’re easy to shop. One could argue shopping is easier because there’s less choice. It’s a convenience play as much as a price play.”

Traditional retailers shouldn’t fall into the trap of competing with an operator like Lidl solely on price, which “has tended not to work,” warns Chris Morley, president of U.S. buy for Nielsen, speaking with PG at CoNEXTions. “They have a very disciplined approach in other markets.”

Morley expects the limited-assortment disruption to drive growth in private label, which predominates on shelves at Aldi and Lidl.

“There’s going to be an enormous response from established retailers in response to that,” he said, pointing to the huge household penetration of private label in the United Kingdom, where he previously worked. “I’m not suggesting that kind of penetration here, but there’s significant opportunity.”

The pace of change is only going to accelerate, according to Hill.

“It took 20 years to get to today, and in four years, it’s going to double,” he asserted.  “Retailers need to be nimble and myopically focused on the consumer. There are conventional retailers that know their markets extremely well, and that’s always going to be their strength.”

Department Snapshot

Total grocery sales across all channels were $2.15 trillion in 2016, up from $2.14 trillion a year ago. Supermarkets’ share of that total declined 0.1 percent to 23.3 percent. Mass and supercenters boosted their share by the same amount, and, together with supermarkets, account for more than 45 percent of all dollars spent.

Despite continuing to lose share, supermarket sales topped $500 billion in 2016, up 0.7 percent from the prior year. That’s down significantly from the 2.6 percent gain posted last year and the 2.1 percent gain logged in 2014, before the past year’s deflation reared its head. Among individual categories, center store grocery categories were only up 0.4 percent overall, while nonfoods were up by half of that.

Interestingly, while fresh categories are seen as a growth driver for traditional grocers, the overall perishables category posted flat in 2016, after two years of increases of right around 3 percent. The service deli rose 3.3 percent, consistent with growth a year earlier and with the continued popularity of the grocerant, or fresh-prepared, restaurant-quality food sold at supermarkets to take home or, at an increasing number of store locations, eat on site in environments ranging from simple café seating to full-service restaurants within stores. Meanwhile, the in-store bakery reported 2.7 percent sales growth for the second year in a row. Fresh produce and floral likewise posted growth exceeding 3 percent.

With the loss of nonperishable sales to online retailers, grocers are relying on fresh categories to draw shoppers in for an experience they can’t get on their computers or mobile devices.

“Retailers need a point of difference and are increasingly turning to the perimeter for it,” Matt Lally, manager of fresh growth and strategy for Nielsen, told PG during Nielsen’ CoNEXTions. “We don’t expect brick-and-mortar stores to be eliminated … [but] as we continue to watch the disruptors, fresh will be playing a bigger role.”

Because of the way the industry is changing, Lally said, “every trip becomes important to converting a shopper to a buyer,” and that involves “breaking down aisle walls to create total store solutions.”

Lally advises grocers to boost their media investment in fresh categories, noting, for example, that produce accounts for 30 percent of all store sales but only 11 percent of a typical retailer’s media spending.

Dragging down perishables were dairy (down 3.6 percent); packaged meats (down 3.1 percent); fresh meat, poultry and seafood (down 2.4 percent); and frozen foods (flat).

Categories like pharmacy and health and beauty care present opportunities for retailers to create experiential destinations for shoppers, including retail dietitians and beauty experts to engage with consumers on their needs. Supermarket pharmacy sales again rose more than 3 percent, although they’ve been sliding over the past three years, while health and beauty care posted a 2.8 percent gain, down from 4.1 percent a year ago.

Retailers such as Giant Eagle and Hy-Vee have excelled at creating store-within-a-store destinations for health, beauty care and other general merchandise departments. But greater effort will be required to halt the erosion to online sales.

“How do you turn the store into a place for excitement and inspiration? Some categories are leaving the store rapidly,” noted Steve Henig, VP of digital for Keasby, N.J.-based Wakefern Food Corp., speaking at a presentation during Nielsen CoNEXTions. Henig, whose company’s ShopRite banner has been a leader among traditional grocers in online and click-and-collect shopping, predicted that the health and beauty category will be exclusively online within 10 years.

Outlook Improving

Though deflation is easing, it set an ominous tone for 2017 as a key contributor to the nosedive grocery sales took in Q1. Categories considered key to growth for traditional grocery retailers received significant hits.

“Despite an increase in overall volume in produce and deli, both of these departments saw significant drops in pricing in the first quarter of 2017,” according to a May 2017 Nielsen report. “If prices would have even held flat with where they were during the same period last year, we would have seen an additional $600 million. When adding in the smaller price deflation in meat and dairy, that number jumps to $700 million, roughly one-fourth of the total decline.”

Five categories — eggs, fresh meat, fresh vegetables, cheese and candy — drove more than a quarter of the total Q1 declines, according to Nielsen data.

“Consumers’ growing focus on health and wellness is directing them toward healthier foods from the fresh department; they’re exercising dietary diligence and buying less dairy, especially yogurt and cheese, and instead, swapping them out for other products or shifting to out-of-home channels.” Nielsen reported. “Consumers are also swapping center store grocery and frozen foods to produce and deli, buying more fresh and prepared items over the last few years.”

Additionally, consumers’ preference for ecommerce is shifting volume, especially in pet, beauty and general merchandise in center store; categories like pet care are garnering more than 80 percent of the category’s overall sales growth online, according to Nielsen.

But, Nielsen notes, deflation has masked healthy growth trends “such as the maturing, long-term shift toward fresh foods and consumers’ relentless focus on transparency. Most of the deflationary categories actually align well with healthy eating trends. As prices rebound — and some already are — these short-term headwinds will reverse course.”

Chicago-based IRI further points to solid prospects for the remainder of the year.

“Forty-five percent of consumers say their household finances are strained, with lower-income and younger shoppers being hit the hardest,” says Susan Viamari, IRI’s VP of thought leadership. “Consumers across the board have been avidly seeking deals and, while deal-seeking will remain pervasive, the good news is that economic expectations for the remainder of the year are positive. With products that offer in-demand bells and whistles and marketing stories that really connect with their target markets, CPG marketers will entice shoppers to spend and win a fair share of that spending.”

According to IRI’s latest Consumer Connect survey, released in May, more consumers, including Millennials, are buying lower-priced brands or private labels, clipping coupons, and shopping multiple stores looking for deals. Meanwhile, CPG consumers are showing a willingness to pay a premium for products with attributes such as added nutritional benefits, as well as for environmentally friendly ingredients and packaging, IRI reports.

Despite the clouds many have seen hovering over the grocery industry in recent weeks, there are definitely rays of light, and food retailers remain committed to comprehensively serving and engaging shoppers.

To see the charts breaking down supermarket sales and share of sales, as well as methodology, click here.