capitalizing on opportunities in fresh prepared foods · 4 capitalizing on opportunities in fresh...

Food & Beverage AnalysisExecutive Insights

Capitalizing on Opportunities in Fresh Prepared Foods

With the increased focus on investing in the perimeter of the grocery store, fresh prepared foods is one of the most interesting growth areas for U.S. grocers. The lines of retail and foodservice have been blurring as grocers realize there is a golden opportunity to capitalize on consumers’ desire for fresh prepared foods and drive foot traffic.

This Executive Insights profiles the high-growth category of fresh prepared foods and why retailers and suppliers alike can expect to find significant opportunities in this market for years to come.

Capitalizing on Opportunities in Fresh Prepared Foods was prepared by Rob Wilson, Jon Weber and Dan McKone, Managing Directors at L.E.K. Consulting. Rob is based in Chicago and Jon and Dan are based in Boston.

For more information, contact [email protected].

How is passenger behavior evolving?


Unlike their international counterparts, most U.S. grocers are still learning how to meet consumers’ desire for fresh prepared foods.

For example, ask any consumer who’s been to London recently: The fresh prepared to-go offerings there are far superior to what can be found in the U.S. Consumers in the U.K. can grab premium wraps, ready-to-eat ethnic meals with interesting flavor profiles, delicious salads and a large variety of other offerings. While there are some good offerings in the U.S., they are limited and inconsistent. The race is on to increase quality at a national scale.

The $34 billion fresh prepared foods market has been experiencing accelerating growth and grew 10% last year, with strong growth expected to continue into the future.

U.S. grocers: increased focus on high-quality fresh prepared foods

Total U.S. fresh prepared foods market – grocery channel

(2011-21F)

Source: L.E.K. analysis

Capitalizing on Opportunities in Fresh Prepared Foods 2

Billi

ons

of d

olla

rs (R

SP)

~$25B ~$26B~$27B

~$29B~$31B

~$34B

~$38B

~$41B

~$45B

~$48B~$51B

2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F

~7% ~7% ~8% ~10% ~10% ~11% ~9% ~8% ~7% ~6%

CAGR2011-16

~7%2016-21F

~8%

Yoygrowth

52

0

8

4

12

20

16

24

32

28

40

36

48

44

Forecast


Fresh prepared foods comprises five mega-categories


Prepared meals & center plate

Ready to eat value-added meals Fresh sliced vegetables Bread (artisan loaves, focaccia, etc.)

Chilled and hot bar soups Chilled sauces

Ready to cook value-added protein

Fresh sliced fruit Desserts (in-store bakery) Chilled dips Leafy salad bar

Rotisserie chicken Decorated sheet cakes Other sauces, dips, condiments, etc.

Fresh prepared produce In-store bakery Sides Other

Nonspecialty (nonleafy) deli salads

Ready to eat (nonleafy) specialty salads

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Which trends are contributing to strong growth in the U.S.?

Capitalizing on Opportunities in Fresh Prepared Foods 4

Consumers

Health and wellness Consumers are increasingly focused on reading ingredients and searching for clean label and organic/natural products

Convenience needs “On the go” eating and snacking has become increasingly popular as consumer sentiment as it relates to snacking has dramatically improved since the 1990s

Eating away from home In April 2015, foodservice spend away from home surpassed spend on food at home and has been outpacing retail growth since 2010

Shopping in store perimeter Household grocery trips to purchase fresh foods have increased 1.0% YoY vs. a 1.3% decline in overall grocery trips

Grocers

Farm-to-table local sourcing In the search for healthier food, specialty and locally sourced “food with a story” suppliers are making inroads against and driving disruption in big CPG

Private label growth Private label penetration is believed to be ~45-55% of the overall ready-to-eat value-added meals market as retailers can promote “made in-house”

Foodservice “in-store” Increased desire for ready-to-eat (RTE) options as consumers look for “an experience” in their grocery trips

Nascent supply base Regional producers (e.g., commissaries) still supply the bulk of fresh prepared foods; food safety remains a concern, with variability in quality and consistency across national chains


Although “best in class” fresh prepared foods retailers like Whole Foods and Costco lead the way with strong penetration rates, the overall U.S. market averages just roughly 4%.

Conventional retailers have been pushing to catch up to higher penetration rates. More progressive retailers like Trader Joe’s and H-E-B have fresh prepared penetration rates around two times the national average, but there is a large segment of grocers that has not yet capitalized on this growth opportunity.

Most retailers are underpenetrated in fresh prepared foods

Fresh prepared dollar sales as percentage of total grocery sales (2016)


Source: L.E.K. interviews and analysis

1,855

#10

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#12

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2006-15EP Ranking

11,035

#1

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#2

10,764

#2

5.6%

#1

10,266

#3

5.4%

#3

5,190

#4

12.3%

#11

5,014

#5

4.0%

#4

3,427

#6

3.9%

#6

2,809

#7

9.8%

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2,375

#8

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N/A

2,171

#9

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#7

Asia Middle East Europe Latin America North America AfricaOceania

Operating cost Regulatory changes Competition Consumer behavior

230 kV

Economic environment

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Current THC

Where does the money go?• Provider and payer admin costs• Provider and payer profit• Provider capital investments

Who drives the excess?• Providers (e.g., too many surgeries)• Patients (e.g., too many interventions)• Fraud

Excess pricingUnnecessary costs – in excess of international norms

Excess utilization Average THC ofother rich nations

0

10

20

30

40

$50

is pricing per unit

is utilization

Indicators of fads/fad risk

Examples:

Description:

Product

Irrationalpurchase

motivations

Limitedproduct

adaptability

Products that are part of a trend solve a customer need, while fad products are often purchased based on irrational purchase criteria, including perceived scarcity, future resale value, etc.

Product adaptability allows products to respond to market needs and desires, allowing them to maintain an attractive value proposition.

Customer segment

Niche market appeal

Fad products may initially appear to be applicable to a large population, but the product value is strong only for a small population subset.

If early adopters are not representa-tive of the larger population (e.g., wealthier, more tech savvy), it may indicate that a product does not have sustained relevance.

Hype

Demandfluctuation/

price changes

Hype bymedia andcelebrities

Industries propelled by celebrity endorsement or media hype are often short-lived, as demand is not based on a fundamental need.

Rapid adoption or price increases in primary or secondary markets may indicate demand based on hype or irrational criteria.

Additional power supply and demand forecasts (2014-2024)Consumption in GWh; installed capacity in GW

NorthConsumption: 25.8 GWh (11%)

Capacity: 27.1 GW (37%)Northeast

Con: 40.7 GWh (18%)Cap: 23.9 GW (32%)

Center-Westand Southeast

Con: 129.0 GWh (56%)Cap: 15.4 GW (21%)

SouthCon: 36.7 h GWh (16%)

Cap: 7.2 GW (10%)

BrazilC: 232.2 GWh (100%)A: 73.6 GW (100%)

126

212

Market average

2024estimates

23%

Existing2014

10%

66%

40

50%

40%

45

35%

11%

16%

42%

+68%

35%

25%

48%

2020-2024

Required transmission grid per level of tension(2014-2024)000 km

30

50

70

10

90

60

40

20

80

0

100

Urgent care Chiropractic ASCs

Commercial*

Physicaltherapy

Dental

Cash pay / other

Directional

Government**

Dermatology Vein care Fertility

1%

1%

4%

6%

6%

6%

7%

8%

11%

11%

11%

13%

16%

17%

21%

21%

23%

38%

40%

0 5 10 15 20 25 30 35 40

Consumer preference for "niche" foods

Rising energy prices

Economic recession

I don’t know

Other

Consumer preference for more convenient foods

Growing threat of substitutes

Volatile commodity / input prices

Affordable Care Act

Regulatory and legislative pressures

Macro-economic headwinds

Falling food prices for consumers

Lack of customer demand

Pricing pressures

Cost of employee healthcare and other benefits

Decreasing consumer spending in restaurants

Increasing competition

Rising labor costs

Rising food costs from suppliers

Most common barriers to growth over the next three years (prompted) 2017 Percent of respondents(N=230)

~40% of the respondents believe the probability of

their business being impacted by the

recession is >15%

~70% of the respondents today believe some degree of threat is posed by

prepared foods in retail

16

26

30

37

30

2922

7

100

60

0

20

40

80

Level of threat posed by prepared foods in retail (2017) Percent of respondents (N=230)

Next 3 years

2

Today

1

Asia

Not a threat

Small threat

Moderate threat

Strong threat

Industry disruptor

333

4

5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Delta UnitedAmerican Lufthansa AirNew Zealand

Joint venture share of total traffic for flights over 3,000 miles (2006-2021F)Percentage of seats

0%

5%

10%

15%

20%

25%

30%

35%

2006

5%

2016

25%

2011

20%

2021F

35%

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~5% ~7.5%~7%

~X% Cumulative GDP reductions

1st severe recession (1930-1931) 2nd severe recession (1981-1983) 3rd severe recession (2015-2016)-6

-4

-2

0

2

4

6

8

10

12

14

16

Real GDP change y.o.y.

High-receptivity promotional periods

Percentage of category sales

woLhgi

H

Low High

ot deriuqer tnuocsid fo leveLesnopser rali

mis etalumits

Low-receptivity promotional periods

0

5

10

15

20

25

30

35

40

Mar

Feb Oct

Jul Aug

Nov Jan

Apr May Sep Jun

Dec

Example client,category A

40

80

60

0

20

47

Managedcare

FFS

2014

72

16

55

2011

57

2008

33

15

42

14

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71% 74% 77% Managed carepenetration

CAGR%(2008-14)

Total 7

3

9

Africa

*setats fo tnecreP

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200 100806040

5

Downside only

10

9

1

Upside only

5

5

Upside and downside

19

14

100

80

60

40

20

0

States withmanaged care

48

States by managedcare status

51

48

14

34

Managedcare

No performanceincentives†

Performanceincentives†

Bonus only Withholdsnot included

Withholdsincluded

No managed care

23

~4

~20

0

10

20

30

2014 15 16

setats fo rebmu

N

Asia Middle East Europe Latin America North America AfricaOceaniaAsia

4 -

20 -

3 -

2 -

1 -

0 -Cruise and ferry travelAir travelRail travel

2B+

3B+

20B+

$250B+ monetization opportunity for the global transport industry

sregnessap fo snoilliB

To engage these passengers, transport providers must adopt a broad

customer lens and a new mindset

5


The lines of retail and foodservice have been blurring in the perimeters of stores as consumers seek fresh foods that are grab-and-go or require little preparation at home. By developing the perimeter of the store, there is a golden opportunity to capitalize on consumers’ desire for fresh prepared foods and drive food traffic for U.S. grocers compared with international counterparts.

Fresh prepared foods expected to continue stealing shelf space

Average shelf space per store by temperature state

(2012-21F)


Source: L.E.K. interviews and analysis

Fresh / fresh prepared / refrigerated (incl. produce, dairy, etc.

Shelf-stable

Frozen

Directional

Perc

enta

ge o

f sq

uare

foo

tage

2012 2016 2021F

10-15 10-15 10-15

55-6550-55

45-50

25-3030-35 35-40

100

80

60

40

20

0

6


Retailers struggle with consistency in a patchwork supply network


National

Less common

Regional

Most common

Local/in-store

More common

7

• Typically refrigerated, shelf stable or shipped frozen

• Served by companies with national distribution

• More branded products relative to other fresh prepared foods

• Made regionally/locally

• Often produced by a patchwork of locally based commissaries

• Perceived by consumers to be fresher and of higher quality

• Varied tastes and preferences by region

• In-store value-added foods (e.g., cooked in-store, premium to-go offerings)

• Typically fresh/extremely perishable products

• Seasonal / rotating flavors

Decreasing shelf life


Rapid growth with continued upside opportunities


The U.S. has nascent fresh prepared product offerings compared with the U.K. as retailers are largely underpenetrated

The lines between retail and foodservice have been blurring as consumers demand “made in store” experiences, thus supply chains overlap

There is a current lack of scale in fresh prepared food quality and consistency because the current network is largely a patchwork of commissaries

The opportunity that lies ahead for grocers and suppliers alike is massive, yet many are unaware of it

How will you capitalize on this opportunity?

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About L.E.K. Consulting

L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and rigorous analysis to help business leaders achieve practical results with real impact. We are uncompromising in our approach to helping clients consistently make better decisions, deliver improved business performance and create greater shareholder returns. The firm advises and supports global companies that are leaders in their industries — including the largest private and public sector organizations, private equity firms and emerging entrepreneurial businesses. Founded more than 30 years ago, L.E.K. employs more than 1,200 professionals across the Americas, Asia-Pacific and Europe. For more information, go to www.lek.com.

L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respective owners. © 2017 L.E.K. Consulting LLC

About the AuthorsRob Wilson is a Managing Director and Partner in L.E.K. Consulting’s Chicago office. He specializes in the Consumer Products & Retail sector, with a more specific focus in the Food & Beverage practice. Rob advises clients on a range of critical strategic business issues, including growth strategy, pricing

and trade spend optimization, mergers and acquisitions, profitability enhancement, and organizational transformation.

Jon Weber is a Managing Director and Partner in L.E.K.’s Boston office. He leads L.E.K.’s Retail and Consumer Products practices and is a member of L.E.K.’s Americas Regional Management Committee. Jon has been with L.E.K. since 2000 and has extensive experience working across retail channels and

with worldwide consumer brands.

Dan McKone is a Managing Director and Partner, and a member of L.E.K.’s Global Leadership Team. Dan co-leads Edge Strategy® services at L.E.K. and is the co-author of Edge Strategy: A New Mindset for Profitable Growth, a book published by Harvard Business Review Press. He also leads the firm’s Customer

Experience and Loyalty service line.

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