Conventional supermarkets are beginning to bend and break as big box, club and natural & specialty outlets gain ground in food retail. According to a report by market consultants Gerson Lehrman Group, seven out of the top nine publicly reporting conventional supermarkets recorded negative same-store sales growth in the first half of 2010, with retail groups A&P and SuperValu (owner of Albertsons and Jewel-Osco, among others) performing the worst. A&P saw same-store sales decrease 6% in the first half of 2010, with its losses nearly doubling in the second quarter compared to Q2 2009. And SuperValu saw same-store sales drop 7%, with food sales falling 10%.
Results were similarly strained for conventional retailers in Q3. A&P sold off six of its Pathway stores to pay off its creditors; Safeway’s same-store sales slipped 2%; Delhaize Group—the Belgian owner of Food Lion and Hannaford—saw U.S. same-store sales drop about 2%; same-store sales at Harris Teeter dropped 1% for the year; and SuperValu landed on the S&P 500’s 10 Worst-Performing Stocks of 2010 list.
Middle-of-the-road retailers have had a tough time staying competitive in the last two years, losing many of their weaker stores to better-faring conventional chains like Kroger, Publix and HEB. At the same time, traditional supermarkets are rapidly losing food sales to natural & specialty, club and big box stores because they lack a brand proposition that can offer either superior quality or superior value. Whole Foods posted unbeatable same-store sales growth of nearly 9% in Q3, generated out of its core natural and organic grocery business as consumers began to trade back up to quality alternatives. And food departments of retail juggernauts like Target and Walmart, as well as wholesale clubs like BJ’s and Costco, offer discounting that traditional supermarkets can’t touch.
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And food is growing! Retailers are not scrambling for morsels on a rotting carcass; they’re competing for share in one of the very few thriving consumer goods categories. Home cooking and pre-packaged meals are especially vibrant, having picked up the slack for faltering restaurants in 2009 and to date in 2010. According to Nielsen, sales of restaurant and celebrity chef branded pre-packaged meals have grown 13% in the last two years. And a private label renaissance has kept food unit growth on the rise as non-food volumes decline.
In the natural & organic sphere, private label has fared especially well. Though Safeway has struggled to generate overall sales growth, its private label organic brand O Organics has quickly become one of the leading organic food brands in the United States, clocking in over $400 million in annual sales. And as for pre-packaged meals, NBJ reported in its 2010 Healthy Foods Report that natural packaged & prepared food grew a recession-busting 10% in 2009, garnering $237 million in new sales.
If food commodity and retail prices inflate as expected in 2011, ultimately it’ll be the big guys who will be able to maintain the most competitive discounts. Big boxes can garner the most leverage on their profit margins to reduce prices, though mid- to large-size natural retailers like Sunflower, Sprouts and Whole Foods stand to gain share from failing conventional supermarkets as well.
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