Sales Decline Moderates for Independents, but Profits Sink

Competition, deflation and rising costs for labor and benefits weighed on sales and punished profits of independent food retailers in 2017, but top-line pressures eased over the course of the year and margins rebounded slightly, leading grocers to proclaim greater optimism for the future.

Those were the findings of the 2018 Independent Grocers Financial Survey, released June 12 by the National Grocers Association (NGA) and FMS Solutions Holdings. The survey showed that same-store sales for 2017 dipped by 0.6% but improved from 2016’s 1.6% decline. The improvement reflected, in part, an easing of deflationary pressures that marked nearly all of 2016 and most of 2017, NGA said.

Sales declined for more than half (50.7%) of the 139 companies participating in the survey, representing independent grocers in 35 U.S. states and five Canadian provinces. When adjusted for deflation, sales were down by 0.4%—very similar to figures in 2015 and 2016.

Average food-at-home prices were 0.2% lower in 2017 than they were a year prior, but they moderated over the course of the year and showed improvement by the end of 2017. The most recent figures from the Bureau of Labor Statistics, also published June 12, indicated very moderate inflation has continued this year.

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“There’s no doubt that the supermarket industry is changing at a rapid pace. However, independent grocers have faced industry shifts and challenges in the past and have proven resilient. They are the entrepreneurs of the industry, and have the ability to experiment and adjust as needed to meet their shoppers’ needs,” Peter Larkin, president and CEO of NGA, said in a release. “This study offers good insight on where the profit leaders are excelling and areas of needed improvement by independents.”

While deflationary conditions allowed for some margin relief, fierce price competition led by some of the nation’s largest chains and discounters resulted in margins of 27.23% of sales, up only slightly from the year before. Grocers in the top 25% of net profits saw greater sales contributions by fresh departments, including produce, meat and deli, at higher-than-average margins, the survey said.

Market conditions drove upward pressure on labor, benefits, rents, utilities and supplies in 2017, and combined with decreasing dollar sales and flat margins, contributed to lower net profits, the survey noted. Net profit before taxes flattened from 0.98% in 2016 to 0.09% in 2017, and EBITDA dropped from 1.85% to 1.40%.

The profit leaders averaged 3.06% in net profits, down from 4.70% in 2016—underscoring that the tough environment impacted all independents. The profit leaders tend to operate slightly larger stores that averaged a greater number of weekly transactions at a higher transaction size. Profit leaders focused on managing inventories, averaging lower shrink and higher turns across departments. They showed a high probability to reinvest into their businesses while minimizing long-term debt.

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“Independents have always faced stiff competition from other retailers, especially big chains and discount warehouses,” said Robert Graybill, president and CEO of FMS. “But now they’re competing with e-commerce, home delivery and meal kits. But our study has shown that independents are able to adapt where they’re able and embrace their strengths over these new formats.”