The Changing Grocery Retail Landscape

The brick-and-mortar retail industry continues to face immense challenges as shopping habits of consumers shift to online platforms. This has become increasingly visible in recent years during the so-called “retail apocalypse” that has hollowed out box stores and shopping centers around the country. We have grown accustomed to closure, consolidation, and bankruptcy announcements from major retailers of consumer goods such as Bon Ton, Sears, Toys R Us and Payless Shoes. By 2026, one recent analysis predicts, another 75,000 retail locations in the U.S. will be shuttered.

Contrary to this retail dilemma for consumer goods, brick-and-mortar for grocery retail business has expanded. In 2018 grocery retailers added an estimated 17 million square feet to their brick-and-mortar footprint, a nearly 30% increase. This reflects both the unique nature of grocery retail (more necessity than other goods) and the ability of majors grocers to keep pace with industry changes.

Given the overall expansion of the grocery industry, what might prompt Kroger to close two Peoria-area locations? Although a specific and detailed explanation for the two Peoria-area Kroger closures may forever remain within the walls of the company’s corporate headquarters in Cincinnati, OH, an overview of grocery retail intelligence may shed light on their decision. Despite the apparent boom, the grocery industry is fraught with disruption, thinning profit margins, and growing competition.

In any case, a better understanding of the state of the industry-at-large can put local matters into the national context and better prepare local residents, businesses, and governments for the future of grocery shopping. Continuous monitoring of this rapidly changing industry can inform both the business planning for alternative local/independent grocery businesses and any business attraction efforts intending to fill the grocery gap in Peoria’s most underserved neighborhoods.  

Rapid Changes to the Grocery Industry

The retail grocery industry is rapidly changing at the national and global scale.  The disruption caused by e-commerce corporations such as Amazon; a proliferation of technologies to streamline and enhance the customer shopping experience; and growing competition from discount stores are driving grocery corporations to rethink their traditional models of operation to remain profitable.

Before more recent reports that show an increase in overall grocery square footage last year, the decade of growth previous to the January 2018 closures had resulted in an overabundance of grocery retail space. Mainstream grocery retailers had slowed openings in the face of an increasingly saturated market.  And although the grocery industry has continued to grow, U.S. grocery sales have recently been in decline.  

At the same time that mainstream supermarkets are dealing with an overcapacity of retail space, discount stores (such as Aldi and Dollar General) continue to expand, further fragmenting the share of consumer dollars. The addition of discount grocers continue to drive prices down while at the same time raising the expectation for cheaper food products. Beyond discount grocers, online grocery sales increased by 15% between 2016 and 2018.  

A report by McKinsey & Company predicts a gloomy forecast for traditional grocers. They say by 2026 massive shifts in revenues to new channels could drastically alter the grocery retail landscape:

Much of the $5.7 trillion global grocery industry is in trouble. Although it has grown at about 4.5 percent annually over the past decade, that growth has been highly uneven—and has masked deeper problems….And it could get much worse. If grocers don’t act, they’ll be letting $200 billion to $700 billion in revenues shift to discount, online, and non grocery channels. Monumental forces are disrupting the industry….When the dust clears, half of traditional grocery retailers may not be around.

This report goes on to attribute the industry disruption to: changing consumer habits and preferences; aggressive competitors and the emergence of alternative sales channels; and the emergence of new technologies.

In the report’s outline of critical areas of focus for grocers to remain competitive it suggests companies “rethink” all of their real estate. Mainstream grocers such as Kroger appear to doing just that.  For instance, Kroger states in their Restock Kroger corporate strategy:

Kroger will reallocate significantly more of the capital that has been traditionally ear-marked for brick and mortar projects to fund technology and infrastructure upgrades and to create alternative revenue streams.

The closures in the Peoria area may fall into this overall strategy for Kroger and other major grocery retailers as they retool their real estate footprint and direct more resources to keep pace technologically and logistically.  The closures appear to be linked to a shuffling of locations during the 2017 fiscal year. Kroger closed 40 stores nationwide throughout the same fiscal year as the Peoria-area closures and opened 42 new or relocated stores according to their FY2017 shareholder report.

At the time of the Peoria-area closures, Kroger officially stated that poor financial performance at the stores forced the decision. In the time leading up to the closures, Kroger experienced a period of lower revenues and a drop in operating income. This may have been a factor in choosing to close certain locations. As the demographic and market analysis overview points out later in this report, the waning population and lower purchasing power of the neighborhoods surrounding the closed locations may have in fact impacted the revenue performance of those stores resulting in their inclusion in that year’s closure list.

Kroger is also putting focus into attracting customers with greater purchasing power by increasing organic offerings and expanding into affluent markets in cities such as Baltimore and Washington D.C.  The company’s attempt to capture more of this key market with greater profit margin potential is likely demonstrated in the two Peoria-area closures. The closures likely increased foot traffic to their other Peoria-area locations, in areas with greater population and traffic density and proximity to competitors such as Hy-Vee.

According to Business Insider, while the largest retailers rethink their strategies, the discount stores continue to expand and increase their influence on the grocery market:

This no-frills, bargain-hunters' paradise is growing at a level that is largely "unthinkable" in retail, Credit Suisse analysts wrote in June.  In 2017, Dollar General opened new locations at a rate of around four stores a day. In 2018, it opened 900 stores, and in 2019, it plans to open 975 more.

The same report also shows that although the majority of Dollar General stores do not currently carry fresh food, their interest in expanding these offerings continues to grow as they look to better compete with Walmart for mid-week shopping.  This interest is encouraged by a significant increase in sales at their 300 stores that currently carry fresh produce. Dollar General also continues to dominate in rural and low-income suburban areas that are often considered food deserts. This gives additional incentive to consider more fresh food offerings and take advantage of the gap in access.  

In fact, in March of 2019, Dollar General announced a rapid expansion of their fresh produce program, as well as a new streamlined self-checkout program, in their report to shareholders:

Looking ahead to 2019, we are excited to introduce two new transformational strategic initiatives, DG Fresh and Fast Track. DG Fresh, which is designed to enable self-distribution of fresh and frozen products, is already up and running in approximately 300 stores and Fast Track, which we believe will enhance in-store labor productivity and customer convenience, is launching soon.

Their 2019 goal is to expand DG Fresh program to over 5,000 stores and further invest in refrigeration in both their distribution centers and stores.  The expansion of Dollar General into fresh foods should be of particular interest to Peoria-area residents living near a Dollar General as well as independent grocers given the potential for disruption of the food retail market.  A report for the Institute for Local Self-Reliance states: 

“Although dollar stores sometimes fill a need in places that lack basic retail services, there’s growing evidence that these stores are not merely a byproduct of economic distress. They’re a cause of it. In small towns and urban neighborhoods alike, dollar stores are leading full-service grocery stores to close. And their strategy of saturating communities with multiple outlets is making it impossible for new grocers and other local businesses to take root and grow.”

Further research and analysis of the proliferation of discount stores is needed and is critical in the ongoing efforts to establish sustainable retail grocery options in Greater Peoria’s underserved urban and rural communities.

Additionally, Hy-Vee and Amazon both have launched small store models which they intend to replicate.  Hy-Vee’s Fast & Fresh convenient store concept—piloted in 2018 in Davenport, IA—offers all the standard groceries as well as prepared meal kits within a 10,000 square-foot location.  The store also operates as a gas station and houses a full-service Starbucks. This store

Amazon, in an attempt to compete with Walmart and discount retailers, is retooling the Whole Foods 365 stores as discount grocery stores.  They are also exploring rural locations that may double as both grocery stores and distribution centers. Both of these models, and others like them, could be furthered explored for their potential to locate in underserved Peoria-area neighborhoods.

Beyond the new brick-and-mortar models of global players, grocery delivery services are also set to expand.  Wal-Mart and Amazon recently launched a pilot program in New York to accept SNAP payments for online grocery shopping.  This two-year pilot is intended to develop best practices for scaling the acceptance of SNAP by online grocery retailers.

The Lyft Grocery Access Program will also expand in 2019 to include a total of 15 cities to offer discounted flat-rate rides to grocery stores for residents with limited transportation options.   

Given the rapid changes throughout the global grocery industry due to relentless disruptions to the traditional model, community members and business leaders interested in filling the fresh grocery gap in underserved neighborhoods need to focus on the industry’s leading edge to either attract newly available grocery store models and/or develop independent businesses able to withstand this growing competition and sustainably fill the grocery gap.