Competing in a Twin-Pressure Grocery Market

It is generally agreed: The U.S. supermarket industry is overstored and oversaturated. As a result, acquisitions, mergers and major remodels are the order of the day—together with costly e-commerce efforts driven by “Amazon fright.”

The world’s dominant e-retailer will obviously gain its share of the grocery market as a result of its acquisition of Whole Foods, but is this threat being overstated? And is there a much greater competitive threat to most supermarket retailers from the price compression produced by discounters led by Aldi?

E-commerce (both click-and-collect and home delivery) is growing fast in the retail grocery industry but is still insignificant in market share. FMI research suggests that online grocery sales accounted for only 1.3% share of total supermarket sales in 2017, and more recent estimates by Coresight Research and Deutsche Bank suggest that despite rapid growth, it may now have reached 2%-3%. This is far short of the reported online nonfood retail share of 17.5%.

Also, given the significant additional costs involved in online grocery for both retailers and consumers, can it continue to grow through the next economic slowdown?

Amazon has—for now—struggled with fresh products and is currently refocusing on brick-and-mortar in the form of Amazon Go convenience stores and more Whole Foods stores to bolster its Prime service. However, led by Walmart and The Kroger Co., much of the U.S. supermarket industry is still focusing time and money on the potential competition presented by Amazon.

In our opinion, the far greater competitive threat for most grocer retailers is from the price and margin compression produced by discounters such as Aldi, Costco, Dollar General, Lidl, Trader Joe’s, WinCo and similar operators.

Most of the price formats, for obvious cost reasons, have only limited commitment to e-commerce. Lidl, for one, has recently cut back on its e-commerce investments in Germany.

In an updated twist on Sol Price’s maxim about “the intelligent loss of sales,” “fashionable” digital investments may need to be reduced, or even ended, if they prove to impair a retail brand’s price image and competitive position. Unless a supermarket operator subcontracts the “cost blame” for its e-commerce program (to an Instacart or similar third party) and minimizes the costs of picking and delivery, it may be unable to compete against the growing discounter-led price compression.

While click-and-collect and home delivery will ultimately work profitably in selected locations, most supermarket retailers will have to make hard choices between their investments in e-commerce and pricing, and identify and promote their positive image differentiation so that shoppers want to bear the “costs” of a visit to their stores. Trader Joe’s—which has many substandard sites—is the standout success in achieving this, and therefore felt able to recently cease costly delivery services in Manhattan. This may be the canary in the coal mine for similar decisions by other supermarket operators in the future.

Success and survival in this twin-pressure world will obviously require skill with in-store operations and merchandising (as exemplified by H-E-B and Wegmans) and will be driven by localizing stores through knowing:

Information is power. And much of it can be gathered without massive budgets, technobabble or rocket science, including, for example, walking competitors’ stores; conducting old-fashioned in-store customer surveys that demonstrate to shoppers that the retailer really cares about their needs and preferences; and measuring and monitoring market share performances. This final point needs to be conducted by store, by trade area and by sectors within trade areas and is particularly effective when integrated with competitive and demographic analysis, and store-specific merchandising and promotional activities.

Finally, grocery retailers who want to survive and grow need to look for competitive insights from beyond their own market areas to others—both domestic and foreign—where the twin pressures of costly e-commerce and discounter-driven price compression are further advanced.

Arguably the most relevant overseas grocery market is the U.K., where the combined market share of Aldi and Lidl has risen from 4.8% in 2007 to more than 13.2% today. In response to the resulting price and margin compression, Walmart is now merging its long-standing, previously very profitable subsidiary (Asda) with Sainsbury; Whole Foods has retreated back to London; and both Amazon and Ocado are yet to gain meaningful grocery market shares through their e-commerce activities.

After more than 20 years of effort by the four major chains, the online share of U.K. grocery sales stands at a combined 6%—less than half the combined 13% captured by Aldi and Lidl, who entered the U.K. market in the 1990s. Will this be the “future scorecard” between online and discount retailers for the U.S. market?

David Rogers is president of DSR Marketing Systems Inc.