The State of Grocery Economics

Going into 2020, considering the economic success the U.S. had been experiencing over the past few years, many assumed that a dip was on the horizon. Especially since downturns have occurred on average every five years for the past 150-plus years, according to the National Bureau of Economic Research. So while many anticipated a recession, it’s safe to say that no one predicted that a pandemic would be the catalyst.

As you’ve probably read ad nauseam, COVID-19 has completely disrupted the grocery economy through increased demand, upended supply chains and more. So what is the state of grocery economics now that states are reopening? And what can we expect moving forward?

How Did the Grocery Economy React to COVID-19?

By mid-March, we saw what could be characterized as an uncharted surge for grocery demand, especially in consumables such as cleanser, paper towel, toilet paper and other nonperishable categories. As lockdowns began, grocers’ sales surged. Kroger reported a 30% same-store increase in March, and our data showed rapid e-commerce growth with an increase in online shopping account registrations of 1,200% and in mobile app downloads of 300% from the previous month before the pandemic hit.

Most grocers were prepared for a surge in demand but not for how fast it materialized. Many of those that were ready had lived through the SARS outbreak in 2003 and learned valuable lessons. Meanwhile, other store chains such as H-E-B were ahead of the curve, running tabletop emergency simulations as early as January and rising to the occasion regarding strategy and messaging.

This demand seems like great news for grocery retailers on the surface. But increased demand has introduced challenges, including an increase in hourly wages, additional cleaning and additional hiring. These investments beg the question: Will grocers see a wash on the bottom line despite the boost in top-line sales?

These issues and a destabilized supply chain has caused grocery prices to rise. Wholesale prices have increased thanks to this disruption and, according to the U.S. Department of Agriculture, food prices rose 3.5% year over year in April—the largest increase since 2012. April food-at-home costs jumped 4.1%, while food-away-from-the home unsurprisingly dropped with Americans cooking more at home during lockdowns. Retail food prices have continued to rise since then.

Meanwhile, the seasonally adjusted U.S. unemployment rate hit 14.7% in April dipping slightly to 13.3% in May. With higher prices and a significantly higher number of unemployed, households increasingly are income-constrained and are much more budget-conscious. As such, grocers are seeing a reduction in basket sizes with consumers making difficult decisions. According to our research with Brick Meets Click, many consumers are changing what they buy and trading down to save money. On a net basis, 14% of the U.S. households who purchase private label reported that they bought more private label during May compared to prior to the COVID-19 crisis. In some cases, shoppers are being forced to turn to food banks as they make the difficult decision to buy groceries instead of paying rent or medication. Simply put, shoppers are making sacrifices.

What Are Grocers’ Strategies Moving Forward?

To adapt to the changing landscape, we’ve seen an increase in demand for contactless shopping. Online grocery sales in May alone hit $6.6 billion, with an average order value of $90 (a $5 increase over April). While there’s not much a retailer can do about wholesale prices, grocers should strive to enhance their online initiatives. As I mentioned in my last article, combating the effects of COVID-19 will be a marathon, not a sprint.

It’s essential for grocers to hone their long-term ability to efficiently deliver e-commerce offerings and support those shoppers in need through easy and affordable access to groceries. This starts with enabling online SNAP benefits and keeping the best interests of all loyal shoppers in mind, no matter their means of payment. While price is top of mind for many consumers, regional grocers can compete best with an elevated shopping experience that meets the needs of their shoppers.

When Will the Grocery Economy Normalize?

Full recovery likely won’t occur until we see stabilization in the supply chain and unemployment return to pre-COVID levels, which could take several quarters. Right now, grocers are focusing their efforts on having the right products on the shelves at a reasonable price, which will surely involve grocers’ placing pressure on CPGs in this space to support margins.

As evidenced, we’re far from being in the clear. Will we see a second wave? Will retailers continue to limit the number of people in stores? These questions and many more will be top of mind for the industry as we continue to navigate this pandemic. In the meantime, the state of grocery economics will continue to challenge grocers to evolve and meet new shopper needs.

Sylvain Perrier is president and CEO of Mercatus.