Grocery Stores and Supermarkets
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Industry Overview
The US retail grocery industry includes about 70,000 grocery stores with combined annual revenue of almost $500 billion. Large companies include Ahold, Kroger, Safeway, and SUPERVALU. The industry is concentrated: the 50 largest companies generate about 70 percent of revenue.
Convenience stores, discount stores, and warehouse clubs and superstores that sell groceries are covered in separate industry profiles.
Competitive Landscape
Population growth and consumer tastes drive demand. Because margins are low, the profitability of individual companies depends on high volume sales and efficient operations. Large companies can offer a wide selection of products and have advantages in purchasing, distribution, marketing, and finance. Small companies can compete effectively by offering specialty products, serving a local market, or providing superior customer service.
Discount stores and warehouse clubs have aggressively pursued the retail grocery market, and Wal-Mart is the largest seller of groceries in the US. Other competition includes specialty food stores, convenience stores, drugstores, dollar stores, and, to some degree, restaurants.
Products, Operations & Technology
Major products sold include perishable foods (50 percent of industry sales); nonperishable foods (25 percent); and nonfood items (20 percent). Perishables include meats/poultry/fish, produce, dairy, frozen foods, and deli items. Nonperishable foods (or dry grocery products) include most packaged goods, such as cereals, snacks, and soft drinks. Nonfood items include health and beauty products, general merchandise, and medication (including prescription drugs).
The industry includes national and regional chains and independent retailers. Large companies may operate multiple chains under different banners. A typical grocery store averages 47,500 square feet; carries 45,000 different items; and generates almost $400,000 weekly, according to the Food Marketing Institute (FMI). Because grocery stores typically serve customers within a one- to two-mile radius, companies carefully consider demographics when selecting store locations.
Grocery stores typically group similar merchandise into aisles to aid shoppers. Stores may have bakeries, delis, pharmacies, and floral departments. Prepared foods sections serve consumers looking for ready-to-eat items. Companies may have sections dedicated to specialty categories, such as organic or ethnic products. Through third parties, companies may have in-store restaurants, banks, coffee shops, or gas stations. Most grocery stores have multiple checkout lanes to process orders and bag merchandise. Some retailers offer self-checkout lanes.
Because grocery retailing is generally a high volume/low margin business, effective supply chain management is key to keeping costs low. While large companies buy directly from manufacturers, small chains and independent retailers rely on wholesalers. Depending on product mix, companies may buy from many distributors and use food brokers. Volume discounts allow big chains to keep prices low. Manufacturers typically offer additional trade funds, which allow grocery stores to discount or promote certain products without sacrificing margins.
Most chains have distribution centers that receive and redistribute merchandise among individual stores. Companies may own or lease truck fleets to transport goods. To reduce transportation and distribution costs, large chains may arrange for direct shipment from manufacturers to stores for certain large orders. Because storage space is limited, individual stores may receive shipments frequently, particularly for perishable items.
Grocery stores must track a staggering number of individual products in various flavors, sizes, and packaging formats. Proper category management maximizes the use of valuable shelf space and helps minimize inventory shrink due to spoilage. Buyers and merchandising staff decide which items to stock, discontinue, or promote. Retailers typically feature and discount different products weekly. Many retailers charge manufacturers slotting fees to stock new products. Companies typically offer a mix of brand name and private-label products, and may customize merchandise selection based on the demographics of the surrounding market area.
Because of the large volume of grocery products companies must manage, retailers rely on computerized information systems to link operations and analyze data. Point-of-sale (POS) systems use scanners to read a product's Universal Product Code (UPC) and process sales transactions and credit card payments. Inventory management programs track products through the supply chain and may automatically reorder products when merchandise runs low. A small number of large retailers are experimenting with radio frequency identification (RFID) systems to monitor product movement. About 70 percent of large companies use electronic data interchange (EDI) to manage purchasing operations. Some companies are testing handheld scanners and cart-attached devices to track purchases as a customer shops.
