Food Retailing

AG BM 102

Introduction

• Major interface with the customer – 2/3 of all food

• Place where customer shows preferences

• A sector in transition

• First stores to act as a group

• Consumer’s number one criteria for choice of supermarket is convenience

Percentage of disposable income spent on food

2010food-at-home

food away-from-home

5.5%

3.9

Source: USDA

Some PA Markets

• Philadelphia

• Pittsburgh

• Central PA - Harrisburg

Chains

• 11 or more stores working as a group

• Corporate chains – company owns everything

• Voluntary chains – independent wholesaler – Thriftway, Foodland, Shop N’ Save

• Cooperative chains – stores jointly own wholesaler – Shop N’Bag

Supercenters

• 20.7% of grocery sales in 2010 (est)

• 28% of sales in WalMart supercenters are groceries & tobacco in 2005

Convenience Stores

• 4.5% of business

• High gross margins

• Access obviously key – Uni Marts, Sheetz

• Cigarettes, lottery tickets, snack food, etc.

Sam’s Club & Costco

• 1,600 items rather than 25,000 for regular store

• Large sizes, one choice, high turnover

• Membership fees.

1970 1975 1980 1985 1990 1995 2000 2005 20100

5

10

15

20

25

30

35

40

45

50%

Food Away From HomeShare of Food Expenditures

Source: USDA

Supermarkets

Supercenters

Convenience storesSpecialty food stores

Farmers, etc.

Other stores

Home deliveries, etc.

Share of Food at Home Sales, 2012

Supermarkets

SupercentersConvenience stores

Specialty food stores

Share of Food at Home Traditional Food Stores

Sales, 2012

Source: USDA

Vertical Integration

• The food chain controls an input supplier• Private labels - 17% of food & beverage

sales in 2009• Bakeries• Dairies• 24% of Kroger's total grocery sales come

from its house brands; 41 company-owned manufacturing plants produce 7,500 Kroger products.

Buying Power

• Key to recent mergers

• Buy for whole country – over a long period

• Makes access difficult for small sellers

• Royal Ahold – Dutch Company – bought up lots of chains, including Giant – largest retailer on East Coast

Concentration

• Market share – how much of market do leading four firms have? Leading firm?

• Relevant market – On selling side small – distribution of major newspaper

• On buying side seems to be whole country

Supermarket ChainsChain Share 1993 Share 2001

WalMart 6% 9.6%

(19% now?)

Kroeger 0% 7.3%

Albertsons 3% 5.6%

Safeway 4% 5.0%

Ahold 2% 3.4%

Sources different – numbers may not be strictly comparable

WalMart

• After the 2.3 weekly trips the average consumer makes to the food store – not profits from food

• Past decade- 29 chains have sought bankruptcy-court protection, Wal-Mart a catalyst in 25 of those cases

• Wal-Mart pays about 20% less in labor costs• 19% of U.S. grocery sales• Sell 32% of Disposable Diapers• 44% of grocery sales in Arkansas in 2002

Walmart has 15% share in at least 75 markets

By 2004 - Top 8 food chains will account for By 2004 - Top 8 food chains will account for 65%65% of total of total U.S. retail food salesU.S. retail food sales

Cornell Horticultural Business Management and Marketing Program

Sales of Top 8 Chains as a % of Total Grocery Sales

26.5 26.3 26 2529

53.5

0

30

60

'29 '48 '63 '75 '94 '99

Supermarket market shareMinneapolis-St. Paul 2009

Cub Foods 35.4*

SuperTarget 13.9

Rainbow Foods 12.9

Wal-Mart Supercenter 9.5

Byerly's 3.7

Lunds 2.8

Trader Joe's 2.0

Festival Foods 1.9

Kowalski's Markets 1.9Source: IRI InfoScan, published by Nielsen Co.'s Trade Dimensions

Supermarket market shareCentral Florida 2012Firm Share

Publix 42.9%

Walmart 26.3%

Winn-Dixie 10.1%

Sweetbay 6.3%

Super Target 3.2%

Save-A-Lot 2.9%

Source Tampa Bay Times, July 15, 2012

1987 20010

100

200

300

400

The number of fresh produce items carried by

food retailers

173

350

Source: Supermarket Business, Progressive Grocer

Economies of Scale

• In store- beyond 30,000 sq. ft. not much

• Advantage of large stores – non-food

• Disadvantages – search costs, supervision

• Warehousing & distribution – considerable economies within about 200 mi. circle – more stores better

Chain Economies

• Buying!!!

• Advertising

• Dis-economies - management

Pricing

• Mark-up pricing – e.g., cost times 1.33

• Coupons

• Image

• competition

Margins

Item Margin Item Margin

Canned goods

16% Frozen foods 25%

Dairy 19% Housewares 33%

Meat 20% Produce 31%

Non-foods >25%

Profit

• 1 to 2% of sales• Depends on turnover of inventory• If profit goes over 2% competition gets

fierce• Much (or most) of profit comes from

promotional allowances from manufacturers

• Labor ~70% of a traditional grocer's overhead.

Industry Trends

• In-store banking

• In-store pharmacies

• More private labels

• More customer service

• Home delivery

• Home meal replacement

Concluding Comments

• An Industry in transition

• Mergers and increased concentration affecting access

• Competition on selling side local