Grocery Stores and Supermarkets
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Industry Overview
The $400 billion US retail grocery industry includes about 40,000 companies that operate 70,000 grocery stores (excluding convenience stores). Large companies include Kroger, Supervalu, Safeway and Ahold. The industry is concentrated: the 50 largest companies hold about 70 percent of the market.
Although not traditional grocers, mass merchants like Wal-Mart and Costco have rapidly expanded their sales of groceries. Wal-Mart is now the largest seller of groceries in the country, with annual grocery sales of about $60 billion.
Competitive Landscape
Demand for food products is limited by the 1 percent annual growth of the US population. Profitability of individual companies depends on having the right product mix and on efficient operations. There are large economies of scale in operations and purchasing. Small grocers can compete effectively only by offering specialty products or better produce or special services such as take-out food.
The average supermarket of large chains has $14 million in annual revenue, and revenue per employee of $150,000. Companies with fewer than five stores have annual revenue per store of $6 million and revenue per employee of $130,000.
Products, Operations & Technology
Grocery stores sell three major types of products: perishable foods (50 percent of revenue); non-perishable foods (30 percent); and non-food items (20 percent). Within the perishables category, the largest sellers are meats and poultry, produce, dairy, and frozen foods.
The operations of retail grocers involve wholesale buying of foods and other products, coordinating delivery to stores, handling and stocking, advertising and pricing, and managing labor. The typical supermarket is 45,000 square feet and carries 40,000 different items, or stockkeeping units (SKUs), but some markets are over 100,000 square feet.
While small chains and independent stores buy most products from wholesale distributors, big chains often buy directly from manufacturers. A grocery chain may buy from dozens of food distributors, either directly or with the aid of food brokers. Contracts with distributors may span several years. Some grocers belong to buying cooperatives that deal directly with manufacturers. The biggest efficiencies for large companies arise from their substantial buying power and efficient distribution systems, which result in lower prices.
Most companies with multiple stores own one or several distribution centers (sometimes over a million square feet) that receive and redistribute merchandise for their stores using a fleet of trucks. Stores are usually within 250 miles of the distribution center. Ingles Markets, a $2 billion chain, moves 67 percent of its product volume through its own distribution system, has 13 percent delivered directly to its stores by a national distributor, and 20 percent delivered by local manufacturers and distributors.
Large chains may leverage their distribution system by selling wholesale to other food retailers. Kroger, the largest supermarket operator in the US, is also one of the largest food distributors. Some companies operate their own bakeries and dairies. Large companies may operate a number of chains with different names, using a central distribution system to supply them all.
Because they have limited space to carry extra inventory, grocers rely heavily on their distributors for frequent deliveries.
Inventory management is very important to grocery retailers, both for efficiency and to identify products that are selling well or poorly. To track inventory and sales, supermarkets and grocery stores use computer technology such as scanners, and sophisticated point-of-sale, inventory, and reorder systems, extensively.