The bricks-and-mortar retail “ice age” is quickly enveloping traditional grocers in its big chill.
As if more bricks-and-mortar competition on the ground isn’t bad enough, grocers are now being forced to chase customers who are tired of old-style consumer packaged goods (CPG). They are being wooed away by fresh food upstarts, meal kit delivery services, “basket bandits,” and the Amazon.Com Inc (NASDAQ:AMZN) army with its never-ending onslaught of online marauders.
Competition and structural disruptions in the $649 billion grocery space (as of 2016’s total revenues), with its average profit margin of barely 2%, are going to create new winners and kill off the slow-moving, undercapitalized, and overly indebted big name grocers.
The German Grocer Invasion
Gone are the days of big grocers trying to inflate thin profit margins by pumping up sales volume per store. There are too many big, aggressive competitors in the already overcrowded space, driving down prices and picking up market share for that to happen.
Traditional grocery chains have been increasing shelf space to offer more goods, at the same time they’ve had to cut prices to compete with the likes of Walmart, Sam’s Club, Costco, and other big-box retailers, not to mention Amazon and online grocery purveyors.
Into the rocky sea of competition, big bricks-and-mortar grocers are also being challenged head-on by discount foreign grocers planting their flags here in the U.S.
Germany’s giant no-frills grocery chain Aldi, with its popular private-label brands and “hard discount” business model, has been opening stores in the American heartland and plans on adding to their store count on the West Coast.
On their heels, Lidl, another big name German grocer, is planning on opening 150 “small-format” grocery stores in 2017, initially in the Midwest and eventually on both coasts.
According to ProgressiveGrocer.com:
Hard-discount formats in Germany grew from nothing to more than 40 percent of the market today. Aldi and Lidl have changed, almost overnight, from niche stores serving only low-income customers to mainstream choices that attract middle-class households and routinely win independent awards for their product quality. When we benchmarked the typical hard-discounter P&L versus traditional grocers, we found that the discounters turn a 12 percentage-point disadvantage in gross margin into a 3.5 percentage-point advantage in EBITDA. They do this with carefully designed operations that leverage deep sourcing expertise, massive sales intensity per SKU on a small number of “bull’s eye” lines, low-labor merchandising and very small-footprint stores. The result is a store that can be profitable with prices up to 20 percent below Walmart’s, and in locations that are too densely populated to support a Walmart Supercenter.
In addition to the frontal assault by big-box retailers and new foreign grocery chains, America’s big grocers are losing business to so-called “basket bandits.”
Basket Bandits, Meal Kits, and What to Look Forward To
Basket bandits, so named because their shoppers carry small store baskets on one arm and pick up items they’d otherwise have to go to grocery stores to buy, include drug store chains like Walgreens, Dollar Stores, and other stores and e-tailers that now carry an increasing number of grocery items for the convenience of their customers.
There’s nothing big grocers can do about the increasing “leakage,” as they call it. They suffer as sales are siphoned off a little bit at a time, but in enough quantity to start impacting profits and changing shoppers’ habits.
But the fragmentation doesn’t stop there. Big grocers are also losing business to meal-kit delivery services like Blue Apron, HelloFresh and Home Chef. As the trend towards home delivery of “fresh” meals picks up steam, grocers worry they’ll lose customers altogether while subscription based meal kit enthusiasts pick up essentials from basket bandits while shopping for other household goods.
Of course, Amazon and the online army are dividing and conquering shoppers everywhere.
Amazon itself now accounts for one out of every two “online grocery trips.” Their grocery revenues are up 25% in the past two years.
As if all the competition hasn’t iced traditional grocers enough, they’ve seen their already thin profit margins thin out more as food deflation hits them hard.
Low inflation is a problem for almost all businesses, since stagnant pricing doesn’t afford the ability to pump up prices and margins along with them. Deflation is worse. In the food business, which has been plagued by deflation essentially since late 2008, already low margins have been further shrunk as low food costs get passed on by aggressive discounters trying to pick up market share and volume to offset lower prices.
According to the USDA, food prices are plumbing lows not seen since 1967.
There’s nowhere for big grocers to hide from the competition they face, from…
- Foreign upstarts muscling in on their territory;
- Big-box retailers expanding their grocery offerings;
- Basket bandits creating a convenient one-stop shop;
- Amazon and online competitors;
- Changing demographics and rapidly changing trends favoring fresher, more locally sourced foods;
- And, last but by no means least, meal kit subscription services.
The winners will be the upstarts, the Internet giants, and the innovators.
I’ll be pointing them out to you in the future, naming names, and telling you how to get on board these fast-track trains.
But right now, it’s easier to make money betting against the comeback of losers who aren’t changing fast enough, aren’t cutting their mountains of old debt fast enough, and are the dinosaurs of yesteryear about to become extinct as the retail ice age buries them forever.
We’re already buying puts on one giant grocer in Zenith Trading Circle that’s sitting on over $14 billion in debt and only a few hundred million in cash. They may be desperate enough buy a “fresh food” chain to extend they’re product lines and garner new foot traffic. If they do that, they’ll only be adding to their massive debt pile and we’ll buy more puts.
I’ll name some losers here in the near future. I’ll tell you why they’re on the wrong track, how they’re going to derail, and whether to short them or buy puts on them.