Grocery Shopping Disrupted...

Buying food today is no longer as simple as showing up at the supermarket to fill up your cart. Now you can go to the farmers’ market and spend a small fortune on local organic duck eggs, white rose nectarines, and artisanal breads. You can pick up a gallon of milk and a pound of butter for cheap at the dollar store. You can go to discount superstores (Walmart), warehouse clubs (Costco), drugstores with pharmacies (Walgreen’s), and higher-end chains (Whole Foods).  Or you can order online for home delivery of conventional groceries or organic produce straight from the farm.

All of this choice means that the traditional supermarket business is under pressure. As the Financial Times wrote this summer, “The dominant form of food retail for the past 50 years is under attack from nimbler rivals on high streets and main streets, from discount food retailers and from the inexorable march of online shopping.”  According to that FT article, large format supermarkets of at least 25,000 square feet still are the biggest grocery channel globally, but they will grow more slowly than any other channel in the next five years (see chart below)

Last autumn, Britain’s big four supermarkets (Tesco, Sainsbury, Asda, and Morrisons) all started losing market share at the same time (see chart below) – something that once would have been unheard of. And the U.S. has seen challenge and consolidation since the financial crisis. Kroger’s, the largest U.S. supermarket chain which stands apart as the lone success story among the majors, recently bought the upscale Harris Teeter. Safeway, which has struggled with fierce competition and slim margins, recently announced that it will go private in a merger with Albertson’s.

All of this is a great reminder that even pokey old businesses like food shopping get disrupted. Traditional supermarkets are getting squeezed by discounters on one end and the high end on the other. Competitors focus on differentiated products and experiences – perhaps with a coffee bar, a sushi chef, an artisan baker, or even a yoga room.  And far and away the highest growth area is expected to be in online sales. The UK is viewed as having the most advanced online grocery market now, while France is the leader in online ordering and in-store pickup.

On the demand side, consumers also are behaving differently. They are shopping more locally and more frequently to stretch their dollars and better manage cash flow -- or for more convenience and better quality choices. They make fewer big shopping trips to fill up the pantry all at once. And they also increasingly split their attention by going to discounters for the basics but upscale grocers for fresher produce, meat, and fish.

All of this means that being a big global super-chain with stores from China to France may not be the advantage once thought. As a result, we have seen multiple retailers reduce their presence in China. We have watched Tesco exit an expensive and disastrous foray into the U.S. market.  And we now are seeing multiple chains go for smaller store formats that can fit more easily into different kinds of neighborhoods.

For stock investors, perhaps there is not much to be done in this space at the moment. Probably the worst moments for the most distressed players are passing now that consolidation, privatization, and management changes are taking place. And for the strong-performing discounters and high-end players, success already is priced in. As we continue to watch food retailing for opportunities, the cautions remain fierce competition, shifting market dynamics, and margin pressure.