Three regional grocers declared bankruptcy in the last week – Earth Fare, Lucky’s Market and Fairway. Here’s why this turmoil will likely spread to the big national chains.
Earth Fare announced it will liquidate merchandise in all of its 50 stores. Lucky’s Market, which has 39 stores, said it will close 30 and sell the rest. Fairway, which has 14 stores, announced it will sell five immediately and negotiate to sell the remaining stores.
The collapse of three supermarkets in a week is a part of a broader pattern of powerful forces battering traditional supermarkets. Much is at stake. Grocery sales in the U.S. account for more than $700 billion.
However, even though the broad category of grocery sales (food, beverage, beauty and everyday household products) is growing, the share of those sales from traditional supermarkets is shrinking.
The number of supermarkets in the U.S. declined by 1.3% last year and is expected to decline by 6% in the next five years, according to CNN.
The decline is due in part to the rise in online sales, which is not all going to omnichannel grocers. Much of it is being siphoned off to non-traditional supermarket chains.
Even Amazon’s supermarket chain, Whole Foods, is struggling to grow. Here are major factors battering supermarkets today:
- Online grocery sales will reach $143 billion by 2025, according to the Food Marketing Institute (FMI). A big portion of these sales flow to supermarkets through click-and-collect and home delivery services, but they come at a huge additional cost compared to traditional store sales. This burden inhibits the financial health of all traditional supermarkets and the cost of remaining competitive is rising.
- Beyond click-and-collect and home delivery costs, traditional supermarket chains are investing heavily in microfulfillment centers, robot-powered warehouses, self-driving delivery vehicles, and many other expensive innovations. This will not only squeeze profit margins for years to come, but it will result in a war of attrition that will further weaken smaller chains that cannot match the high investment levels of the major players.
- Smaller format grocery stores in urban areas have become a growth category for Target, Walmart and Amazon, which is scheduled to launch a new small-footprint grocery this spring. These are replacing supermarkets in urban areas where the population density enables click-and-collect and home delivery to be a profitable business model.
- The Direct-to-Consumer (DTC) trend by powerful consumer goods manufacturers is growing. Once held back by channel conflict issues with supermarket chains, consumer brands are now opening brand stores and selling online.
- Supermarkets that believe investing in organic, fresh, healthy and local are discovering they are table stakes and not a source of growth. Earth Fare, Lucky’s and Fairway all had strong brand identification with organic, fresh, healthy and local.
- New curated food retailers like Farmstead deliver perishables and other items to the homes of shoppers. Many of these orders are for shoppers who have a weekly subscription memberships.
- Regional grocers (large ones, too) are facing intense competition from aggressive expansion plans by two European giants – Aldi (1,800 stores with plans to grow to 2,500 by 2022) and Lidl (127 stores opened by end of 2020 after just three years).
- The massive growth of dollar store chains, which have moved aggressively into the food category (including fresh foods), is siphoning off a significant percentage of traditional supermarket shoppers. Dollar Tree has 15,000 stores. Dollar General has 16,000 stores and plans to open 1,000 more in 2020.
What happens when about 5% of your shoppers today, and as much as 20% in five years, stop coming into your supermarket and shop online? The big grocery players will weather the storm with experimentation and large investments in innovative services and formats. These include Amazon, Walmart, Target, Kroger, Albertson’s, Ahold Delhaize and Publix.
Those without sufficient financial resources to make bold changes to their current business models, such as Earth Fare, Lucky’s Market and Fairway, will not succeed in an era when the traditional supermarket is under siege and approaching a tipping point.