Pandemic investments cost U.S. food retailers $24 billion, FMI study finds

The U.S. food retail sector has spent nearly $24 billion on COVID-19 pandemic-related costs, and a large majority of industry stakeholders expect sales and profits to decrease in 2021, according to research from FMI-The Food Industry Association.

In a videoconference on Wednesday, FMI President and CEO Leslie Sarasin shared findings from a new study, “Receipts from the Pandemic: Grocery Store Investments Amid COVID-19 and the Resulting Economics of an Essential Industry,” which detailed the safety, workforce, technology and compliance expenditures that grocery retailers made in the first year of the pandemic to keep their businesses operating and protect customers and employees. 

FMI said the research reflects results from a survey of 52 member companies representing about 40% of the food retail industry with operations in all 50 states and the District of Columbia. Combined, the respondents operate nearly 14,000 stores and have almost 2 million employees, or about 40% of the nation’s approximately 5 million grocery store workers. 

“As we mark one year since the pandemic took hold in the U.S., we at FMI wanted to take the opportunity to measure how the food retail industry itself responded to the changes it faced in consumer habits and behaviors to safely keep their doors open and keep Americans fed. As part of this effort, we also wanted to quantify the store-level operational costs of meeting these new consumer demands, while also maintaining the health and safety of employees and consumers,” Sarasin said in the virtual event. “To do this, we surveyed our membership to gain a better understanding of the universe of actions they took in response to the pandemic, everything from in-store safety measures to new hires and new service offerings for customers. Here, I’m talking about things like curbside pickup and online ordering, things that were present before but not at the levels we find them today. And we were extremely pleased with the response from our members.”

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Creating a safe shopping and working environment

The roughly $24 billion spent by food retailers in the first year of the crisis — since the World Health Organization declared COVID-19 a global pandemic on March 11, 2020 — included $12 billion in payroll and incentive pay, $5 billion in increased benefits, $3 billion in cleaning/sanitation supplies and labor, $1.5 billion in technology and online delivery costs, $1 billion in personal protective equipment (PPE) and related expenses, and $1 billion in non-monetary benefits and vaccine incentives, FMI reported.

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“Retailers responded by ensuring their stores were following CDC guidelines to help protect employees and customers, and these guidelines included the kinds of investments that you’ve seen in grocery stores,” Sarasin said. “They invested in plexiglass barriers, labeling to show people where they should stand to maintain social distancing, masks and other PPE, as well as increased sanitation measures. And to further accommodate social distancing, adhere to CDC guidelines and reduce high-touch areas, grocers also preemptively shut down some of those high-margin areas of the store, like bulk food sections, salad bars, hot food stations, delis, etc. Overall, to date, the additional expenses incurred in the food retail industry to operate during COVID-19 has amounted to nearly $24 billion. These expenses have included increases in payroll, employee benefits, PPE and other safety expenses, cleaning and sanitation expenses, and technological advancements to accommodate consumer demands.”

In the area of safety gear and products, grocery retailers invested more than $225 million on face masks and over $160 million on gloves, FMI’s report said. Other outlays included nearly $110 million on plexiglass shields, more than $65 million on hand sanitizer, $20 million-plus on safety signage, and almost $300 million on related items such as air purifiers, goggles, face shields, coveralls, disposable aprons, thermometers, disinfecting wipes, keypad/pin pad covers, sprays, sprayers, fogging systems, deep cleaning, rapid COVID-19 tests, “made safe” labels, touchless hand sinks, security and product loss. Another $2 billion in expenditures came from hiring of additional cleaning and sanitation personnel and retaining third-party services to assist in those efforts.

“Just keeping employees and customers safe during the pandemic remains job one for our industry, which is why food retailers have spent more than $1 billion on PPE and other safety expenses,” Sarasin said. 

She noted that those costs were felt unevenly across the food retail arena, with smaller operators incurring double the expenses per store for PPE and other safety measures versus larger operators.

“Based on our survey data, smaller food retailers — those who operate 10 stores or fewer — report spending roughly $50,000 per store on safety related expenses. Conversely, larger operators, or those with more than 10 locations, spent about $24,000 per store,” said Sarasin.

High demand for labor

By far, labor costs have been the biggest expense for grocery retailers during the coronavirus crisis, representing about half of total outlays, according to FMI. Since the start of the pandemic in the United States, the number of food retail employees rose 10% and payroll costs grew over 12%. 

Data provided by survey respondents indicated that the grocery industry has paid nearly $40 billion in employee benefits, up 14% from 2019. That encompasses the total cost of employee benefit programs, including companies’ share of payroll taxes, federal/state unemployment taxes, holiday/vacation pay, group insurance plan payments, pension and profit-sharing plans, retirement and severance pay, holiday bonuses and workers’ compensation. 

In recognizing employees’ extra efforts, grocery retailers paid almost $10 billion in bonuses and incentive pay amid the pandemic, based on responses from members surveyed, FMI said. That translates to more than $1,600 per employee, on average, and added 10% to payroll expenditures. The study revealed that companies also invested in training, education, free meals, gift cards and other non-payroll related benefits, to a total of about $700 million, or roughly $140 per employee. 

“And at a time when many businesses were forced to close their doors or lay off workers, grocery stores actually increased their total number of employees by 10%, or roughly 500,000 individuals,” Sarasin said. “The industry has helped to provide full-time, part-time and bridge work to millions of people in the U.S. during this crisis. Between 2019 and 2020, food retailers added more than 350,000 part-time jobs, an increase of 14%, and more than 100,000 full-time workers, an increase of 5%.”

What’s more, demand for extra hands persists, as 94% of respondents reported having current job openings. “There are still many more jobs available,” said Sarasin. “In fact, if the food retail industry could fill all the openings they have available today, they could likely add another 100,000 jobs.”

Other costs add up

The pandemic’s ripple effects also were felt across the food supply chain and had a big impact on store operating expenses. The FMI report said that among those higher expenses was the cost of transporting products — inbound, outbound and warehousing — to meet consumer demand, which rose by $7 billion for the industry. 

And to help Americans climb out of the pandemic, grocery retailers have spent more than $40 million through mid-March 2021 in preparing to administer COVID-19 vaccines, based on members surveyed. Those expenses include refrigeration, software, education and training, and tents or other clinical dividers. 

A 300% jump in e-commerce sales in the early months of the coronavirus crisis also led grocers to quickly boost their online capabilities as more Americans embraced contactless services like home delivery and curbside pickup.

“Retailers have spent almost $450 million on technology to accommodate online shopping,” Sarasin said. “And to accommodate the delivery of online orders, groceries invested $1 billion in delivery services or partnerships with third-party providers for these services.”

Tough financial outlook

Against the backdrop of the COVID-19 outbreak, FMI said, food retailers have been adapting to four significant — and abrupt — industrywide changes: a rapid shift to eating at home, a retrenchment of foodservice demand, higher production and processing costs, and increased store operating costs. 

Food pricing saw 5.6% inflation from June 2019 to June 2020. And in February 2020, before the pandemic, 52% of all household food spending went to restaurants and foodservice; just two months later, that share sank to 34%, redirecting some $23 billion in spending to the grocery sector. 

FMI President and CEO Leslie Sarasin noted that its members' 12,000 supermarket pharmacies are 'working fervently' to get Americans vaccinated for COVID-19. (Photo courtesy of Giant Eagle)

“COVID-19 forced nearly all of us to rethink how we approach our daily lives,” Sarasin said. “In particular, this included a sudden and dramatic shift in when and how all of us as Americans purchase food for ourselves and our families.”

Those trends have played a pivotal role in the pandemic’s financial impact on food retailers and will shape the industry’s outlook going forward as the nation emerges from the pandemic, according to FMI’s analysis.

Fueled by consumer stockpiling behavior early in the crisis and continued high demand for groceries and other staple supplies, grocery industry sales climbed about 11% year over year to $1 trillion in 2020, based on respondents’ data, the report said. 

Growth wasn’t commensurate at the bottom line, however, FMI noted. Of the $100 billion in additional sales during 2020, $70 billion (70%) went toward the cost of goods sold. Taking out the $24 billion in pandemic-related costs, that leaves $6 billion in sales gains contributing to the industry’s overall profit margin. Respondents reported that their 2020 profits edged up 1.44 percentage points to 2.50%, driven primarily by the initial sales spike at the start of the pandemic. In 2019, respondents’ average profit margin was 1.06%.

“Now, importantly, the companies we surveyed don’t anticipate sales increases seen during 2020 to continue throughout 2021. In fact, more than 50% of respondents expect their sales and profits to decrease in 2021,” said Sarasin. “And as consumer spending and food consumption habits begin to reflect the pre-pandemic environment. We're expecting to see a natural decline in sales this year. However, given that the pandemic remains an ongoing public health crisis, it's important. In fact, it's critical that our food retailers remain vigilant against the virus and continue to invest in health and safety measures.

Overall, 63% of FMI survey respondents expect sales to decline in 2021, 13% project flat sales and 23% anticipate increased sales. On the earnings side, 75% of respondents forecast lower profits in 2021, and just 10% expect increased profits.

“This is undoubtedly been a tremendously challenging year for all Americans, and I’m especially grateful for all of the work and the commitment and the perseverance of our industry’s workforce throughout this time,” Sarasin said. “And while 2020 presented a once-in-a-lifetime challenge, the food industry stands ready as essential partners to not only provide food and household products, but also to serve as safe, convenient places for customers to receive the COVID-19 vaccinations in the weeks and months ahead,” she added. “Our 12,000 supermarket pharmacies are working fervently to get Americans vaccinated as safely, efficiently and quickly as possible.”