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03/20/2013

Who's Shopping Where – and Why?

If the industry's current state of flux has you flummoxed, your confusion is understandable.

Multiple economic and demographic trends are converging, sometimes contradicting one another. The local foods movement might seem a given, yet some research indicates the up-and-coming generation of millennials, generally defined as those born between 1980 and 2004, cares less about where foods are produced than their baby boomer parents.

Likewise, most experts say the economic downturn has fueled the growth of discount food retailers, giving rise to more groceries in dollar stores and mass merchandisers, yet high-end retailers also have taken off. While millennials might be the most cash-strapped of any generation, many have traded after-work stops at restaurants for grocery stores, where they are more willing to splurge on foods they want. So they, along with affluent adults in the generations ahead of them who have made Whole Foods Market so popular, are contributing to the dichotomy in the marketplace.

What's a retailer to do? Retail Leader sifted through the latest industry research to understand the trends and peek at the future of food retailing.

Economic Shifts

The financial crisis of 2008 that propelled the nation into recession has given way to "persisting disruptions" in the world market, including recurring oil supply threats, an economic downturn in Europe, quality control issues in emerging markets, and the ongoing debate over regulation in the United States, according to PricewaterhouseCoopers and Kantar Retail in the report, "Retailing 2020: Winning in a polarized world."

Over the short term, the net effect is ongoing uncertainty for consumers and retailers alike, while in the long term, the United States should see improved conditions for growth. But the value-oriented shopping habits many consumers honed during the downturn are expected to linger. "The major catalyst was the downturn certainly. That started a cascading series of events. The momentum has been maintained and increased by investments made in dollar stores" and other alternate channels, says Pat Conroy, vice chairman at Deloitte, which recently published reports on dollar stores and warehouse clubs.

Total food spending by store type
Source: Jefferies-AlixPartners research

Two-thirds of Americans have changed the way they shop for groceries due to the recession of 2008 and 2009, PwC and Kantar say, with frugal consumers willing to shop multiple channels for the best value. Discounters became the fastest-growing retail channel, but other channels began emulating the pricing and smaller format of dollar stores with hopes of capturing recession-weary shoppers who were shopping closer to home to save money on gas. Drugstores added groceries, and supermarket chains Giant Eagle, Kroger and United Supermarkets have rolled out new convenience stores with more fresh, prepared foods, furthering the channel blurring.

"The consumer wish list doesn't vary by channel. I want to be able to get it as easily and efficiently as I can," Conroy says.

While the economy is likely to pick up by 2017, IBISWorld expects growth for supermarkets and grocery stores to be stunted at about 0.4 percent annually, due to increased competition. In a December 2012 report, the market research firm pegs the supermarket industry's revenue at $492.3 billion, representing an annual growth rate of 0.6 percent from 2007 to 2012.


"The previous [recessions] have left a bruise. This one left a scar that is going to forever change how consumers shop."

– Pat Conroy,

Deloitte

The miniscule growth projections stem from the notion consumers won't abandon their new shopping habits any time soon. "The previous [recessions] have left a bruise. This one left a scar that is going to forever change how consumers shop," Conroy says. Many feel "guilt at the indiscriminate way in which they bought products" before the recession and "remorse at how wasteful they had been," he says.

As a result, consumers with six-figure incomes who hadn't previously shopped at dollar stores gave them a try and liked what they found, Conroy says. "They now think this is a viable shopping destination for a whole host of reasons."

As dollar stores have made improvements, such as widening the aisles and adding lighting, to lure customers, warehouse clubs expanded their offerings to include organic foods and other products that have attracted high-end consumers. "Eighty-five percent of CPG executives we surveyed think the club channel is going to increase in importance for them in the next three years," Conroy says.

With annual revenue increases of 7 percent from 2001 to 2011, warehouse clubs now represent a $148 billion industry that generates about 10 percent of sales for CPGs that sell to them, according to a Deloitte report.

But consumers don't always have time to walk the vast aisle of club stores, so more are making new use of the Internet to preview promotions and compile shopping lists before heading to brick-and-mortar stores to shop. That's also a habit unlikely to fade. Product information, or "transparency," has become more important for many consumers, particularly millennials who value getting the lowest price over brand loyalty, according to "Trouble in Aisle 5," a report by Jefferies and AlixPartners.

Generational Shifts

But millennials are more loyal to brands than they are to retail banners, with many of them spending about 40 percent of their food budget at traditional grocers and the rest at a variety of other channels. When they want fresh products, however, 80 percent of millennials shop at traditional grocery stores, the Jefferies report says. Cost-conscious millennials often shop on price, but they are willing to spend more for natural and organic products. They name Trader Joe's as a favorite packaged food brand.


"There is a big move toward fresh in this country, but particularly with the millennials."

– Scott Mushkin,

Jefferies

All retailers should be watching this group because their spending is expected to double in importance as the baby boomers' incomes and spending declines. "The over-25 millennials, their purchasing power is going to rise substantially over the next 80 years," says Scott Mushkin, equity analyst at Jefferies."There is a big move toward fresh in this country, but particularly with the millennials." They're also more likely to switch to lower-priced retailers to save money than baby boomers are. About 62 percent of millennials surveyed agreed with the statement, "I don't focus on brands; I focus on the lowest price."

Consumers' growing use of the Internet and smartphone apps for grocery shopping to get the best price is just one indication of the younger generations' influence on retailers, who are scurrying to develop new technologies and social media programs. Their desire for transparency also promises to influence retailers.

Household and Hispanic Trends

As the baby boomers age, they're likely to spend less overall, but more in health-oriented product categories. The aging of this demographic group is contributing to smaller household size, another trend that bodes well for small-format discounters, particularly those offering smaller package sizes.

U.S. Sales Growth Projections by Format
Source: Kantar Retail Analysis, 2012

Countering this trend, however, is the rapidly growing Hispanic population, which has larger-than-average households. Hispanics also tend to cook at home more than Americans as a whole, contributing to their larger basket sizes. On average, Hispanics spend $112 on routine grocery shopping trips, compared with $98 for the population as a whole, and they spend $129 on stock-up trips compared with $117 for the overall population, according to a report by AMG Strategic Advisors and Univision Communications.

The U.S. Hispanic population is on track to rise 33 percent by 2020, when one in five Americans will be Hispanic, AMG reports. As their marketing power gets noticed, Walmart and other mass-market retailers and CPGs increasingly are stocking more ethnic foods and adjusting their marketing to meet their needs, says Liz Sanderson, vice president of brand solutions at Univision Communications. Even more than the general population, Hispanics use smartphones and the Internet to print coupons or sign up for email discounts, participate in online sweepstakes and research products and pricing.

While Hispanics over-index on grocery store shopping, they've also been visiting dollar and discount stores.

The dollar store channel is among the fastest-growing, and now represents a $55.6 billion industry with the top three dollar retailers operating more than 21,000 outlets, Deloitte says. Dollar store customers make three to four trips to dollar stores per month, spending an average of $29 a month, less than half of what most consumers spend at supermarkets, but the format has been attracting wealthier consumers since the recession began.

Dollar stores "have invested a lot in the customer experience with wider aisles, better displays and more help available if needed," Conroy says.

To succeed in the future, the PwC/Kantar report suggests, retailers must listen to their customers, glean knowledge from income and demographic data, and rely on consumer insights obtained by analyzing loyalty data to make decisions on store formats.

Freelance writer Ann Meyer serves as senior editor of Retail Leader.