Authored by industry experts:
| Joel Berrian, CPCU, ARM, AIC
| Joe Bermudez, Esq
Amazon’s multi-billion dollar acquisition of Whole Foods is the latest disruptive evolution in food retail’s historic transformation. This year alone, the disruptive influences are hitting at breakneck speed. Mass merchandisers, supermarkets, grocers and their supply chain partners must understand and be prepared to protect brand and balance sheet in an increasingly volatile, competitive and precarious landscape.
Amazon’s investment in Whole Foods sent a clear and unmistakable message: bricks and mortar are critically essential to food retail. For supermarket chains and independent grocers, this is welcome news. However, the message also provides that there is a lot of work to do to protect your turf = customer loyalty.
While Amazon’s news and Walmart’s recent Jet.com purchase created huge headlines for the D2A innovations disruptively evolving food retail’s environment, another critically fundamental evolutionary force, which will have an immediate impact is the change in customer expectations. While there has been a lot of discussion regarding the differences in millennials buying habits, long-term they appear to be trending towards the same habits enjoyed by older generations. What is truly disruptive about customers’ changing expectations, it is happening across all generational lines.
Simply put, the Age of Transparency is currently the most significant transformational evolutionary change influencing food retail. While on the surface transparency appears to be a simple concept of merely providing more information to customers, transparency requires full customer engagement on many different levels. As the Food Marketing Institute (FMI) recently provided with its latest report, 2017 U.S. Grocery Shopper Trends, “U.S. grocery shoppers want more than just information; they desire transparency that engages them, offering assurances of food safety, the pursuit of health and wellness, the appetite for discovery and a closer connect to food.” For supermarket chains and independent banners, understanding and effectively providing transparency to address changing customer expectations is critical for growth in brand awareness, customer base and revenue.
Lidl’s U.S. arrival has also created recent headlines. However, digging deeper, Lidl’s arrival is not significant from a disruption perspective. Rather, Lidl’s success, which has lead it to our shores, is based on another significant disruptively evolutionary force: the move away from center store.
Prepared foods and private label are food retail’s leading growth differentiators. As the growth accelerates, both sectors present supermarkets and grocers with the best opportunities to truly differentiate. For example, 90% of the products offered in Lidl’s new stores are private label. On a more interesting note, Walmart has recently introduced a designer cantaloupe. For the committed banners, prepared foods and private label have delivered remarkable growth, customer loyalty and critical separation from competitors. Grocers, which have astutely invested in the development of prepared food offerings and private label products, have enjoyed impressive performance outpacing competitors. Furthermore, Supermarkets strategically focused on the periphery have gained remarkable growth in the $28 billion prepared foods sector. When combined with the private label sector, which has achieved $150 billion in sales and over 22% of the total market, the invested banners have enjoyed extraordinary success. Supermarkets, which have “cracked the code” of consumer preferences through prepared food and private label offerings and differentiated themselves from national brands and competitors, will continue to outperform expectations.
Prepared foods and private label also significantly affect grocers’ brands as they add the title, food manufacturer. Brand is now front and center. This transformative force merges with another disruptively evolutionary force, the new food safety regulations. Over the course of the last nine months, regulations under the FDA Food Safety Modernization Act (FSMA) and related Foreign Supplier Verification Program (FSVP) have come into effect. The overhaul in food safety programs has and will continue to have a significantly disruptive impact on the food industry, including food retail, for the next several years. Moreover, food product recalls are increasing. Last year saw a 24% increase in recalls from the previous year, and this year looks to be worse. More specifically for food retail, the CDC has found that outbreaks linked to supermarkets has more than doubled.
Food retail’s disruptively evolving environment has wrought significant changes: new C-Suite appointments, changing customer expectations, unfamiliar supply chains, enhanced operations and the dissimilar role of food manufacturer, all of which present noticeably novel risks and exposures. With the number of supermarket recalls on the rise, food retail’s brand and balance sheet are exposed more now than at any other time in history. The unique challenges brought about by this disruptive evolving environment will require significant investments in brand, store and people. Outperforming competitors will require divergent thinking, innovative solutions and creative offerings. Use the same out-of-the box thinking to protect brand and balance sheet.