FMI sizes up pandemic’s financial impact on food retailers

Consumer demand for groceries swelled by 50% last year, lifting food retailer same-store sales nearly 16% industrywide, according to new research in FMI-The Food Industry Association’s “The Food Retailing Industry Speaks 2021” report.

On average, grocery retail comparable-store sales rose 15.8% year over year in 2020, marking the fourth straight year of increases, FMI said in the Industry Speaks study, released Wednesday. Fueled by consumer stockpiling as a result of the COVID-19 pandemic, the gain dwarfed same-store sales growth in recent years, including 3.3% in 2019, 2.5% in 2018, 1.7% in 2017 and 1% in 2016.

Over 90% of the food retailers surveyed reported higher same-store sales for 2020, with double-digit increases across company sizes. Retailers operating more than 100 stores averaged gains of 15.8%, compared with 14.7% for those with 11 to 100 stores and 18.5% for those with one to 10 stores.

FMI’s study is based on responses from 103 food retail and wholesale companies representing a combined 38,000 stores. A third of respondents operate more than 100 stores, and over half are independent grocers with fewer than 10 stores. Forty-one percent of companies generate annual sales of more than $1 billion, and 45% report less than $250 million in yearly sales.

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“Food retailers experienced significantly higher sales and transaction sizes during 2020, but expenses have also surged and impacted financial performance. And that situation continues in 2021,” FMI President and CEO Leslie Sarasin said Wednesday in a video press call on the Industry Speaks 2021 report.

Crunching the numbers

Average weekly sales per store among retail respondents advanced to $585,250 last year from $554,958 in 2019 and $474,182 in 2018, even as weekly transactions per store fell to 13,336 in 2020 after rising to 14,732 in 2019 from 13,583 in 2018. Sales per square foot of total selling area climbed to $17.02 ($12.33 for total store size) in 2020 from $15.15 ($10.66 for total store size) in 2019.

Net profit grew to an average of 3% of sales in 2020, up from 1% in 2019, 1.2% in 2018 and 1.1% in both 2017 and 2016. Gross margin across food retailers surveyed came in at 30.5% last year, holding the line from 30.8% in 2019 and just over 30% between 2016 and 2018. In addition, total payroll and employee benefits shrank 1% and 0.5%, respectively, as a percentage of sales.

"The dramatic increase in pandemic-related costs ensured that profits did not increase by the same level of sales." — Leslie Sarasin, FMI-The Food Industry Association

However, total expenses climbed to 31% of sales in 2020 from 28.9% in 2019, and grocery retailers’ effective tax rate edged up to 22% from 20% in that time span. Also, as FMI reported earlier this year, the U.S. food retail sector spent almost $24 billion on pandemic-related costs, including $12 billion in payroll and incentive pay, $5 billion in expanded 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.

“On the positive side, 93% of retailers surveyed cited increases in same-store sales growth. And this was true across retailers of all different sizes,” Sarasin said. “Despite these strong sales numbers, net income for 2020 was only 3%. The dramatic increase in pandemic-related costs ensured that profits did not increase by the same level of sales.”

The e-commerce effect

Ninety-five percent of grocery retailers offering e-commerce services saw online sales rise last year, with an average gain of 224%, the Industry Speaks 2021 report said. The average online sales transaction of $110 in 2020 nearly tripled the $42 average in-store transaction.

Booming demand for online grocery service led 58% of retailers to add staff for online fulfillment, and 25% allocated more associates for online delivery orders. Still, 34% reported an unprofitable e-commerce business in 2020, compared with 61% saying it was somewhat profitable and only 5% saying it was very profitable.

With the upsurge in online sales also came increased customer use of credit and debit cards — and their high interchange fee charges to merchants, Sarasin noted. Use of credit/debit cards accounted for 79% of transactions in 2020, up from 78% in 2018 and 73% in 2018.

Also driving the higher incidence of card payments are retailer expansion of “frictionless” checkout, FMI’s study revealed. Transaction share via self-checkout lanes rose to 29% in 2020 from 23% in 2019 and 18% in 2018. Last year, 92% of retailers accepted mobile payments, up from less than one-half in 2018, and 47% offered scan-and-go checkout, up from 33% in 2019.

Interchange fees averaged 0.9% of sales in 2020, down from 1% in 2019 and the same percentage as in 2016 to 2018. Retailers with online sales in 2020 reported that card processing fees were 1.7% of their total online sales. The result: an average profit reduction of more than $5 million per retailer.

“Increased online and frictionless transactions are supported almost exclusively by credit cards and debit cards, with an average 1.7% processing fee per credit card and debit card,” Sarasin explained. “As a percentage of total online sales — almost double that of in-store sales — these fees impact smaller stores more than they do larger operators, and they come directly from the bottom line of food retailers, with 65% of respondents saying credit and debit interchange fees negatively impacted their businesses in 2020.

“Congressional action to raise taxes and impose other new mandates make financial planning in an economy still trying to gain footing from the COVID-related shutdowns a source of significant uncertainty,” she added. “So the industry is already highly taxed and has one of the smallest profit margins of any major economic sector, last year at 3%. So increases in tax rates impact our bottom lines directly and noticeably.”

Health care, labor, supply chain among top concerns

Health care costs, too, are having a noticeable impact. Fifty-six percent of food retailers said their health care expenses escalated from 2019 to 2020, with an average increase of 10.2%, compared with 23% seeing lowers costs, with an average decrease of 8%. That translates into a 3.7% overall cost hike. For 2021, 70% of retailers expect health care costs to rise (9.3% average increase) and 2% expect costs to decline (2.4% average decrease), meaning a 6.5% overall cost increase for the year.

“The industry’s slim margins are also significantly influenced by healthcare costs. In fact, 56% of food retailers experienced increases in health care costs in 2020 and nearly three out of four expect their total health care benefits costs to increase by an average of 10% by the end of 2021,” Sarasin said. “For the retailers whose health care costs increased in 2020, more than half fully absorbed the benefit plan costs increases themselves, while only a third raised employee premiums.”

Looking ahead, grocery retailers cite labor as a top concern as the pandemic lingers. Of those polled in FMI’s study, 80% said their ability to attract and retain quality employees remains a challenge that’s negatively impacting their businesses. What’s more, 71% indicated that wages hikes and extra bonuses to attract and retain employees are impacting their businesses as well.

“Child care responsibilities, health concerns stemming from public-facing work responsibilities and extended unemployment benefits led to high turnover rates for food retailers in 2020,” Sarasin said on the call. “Average turnover for all employees was 58%, an 18% point increase from 2019. Part-time turnover was especially high at 74%, up 22 percentage points from 2019, while full-time employee turnover also saw a nine percentage point increase. So to attract both full- and part-time employees, retailers have offered a combination of higher wages, bonuses, improved benefits, flex time, and training and skills development opportunities. Yet, as we seen across the entire labor market, these efforts just haven't been sufficient to help retailers recruit and retain sufficient labor levels.”

Ongoing supply chain issues since the early days of the COVID-19 pandemic are “among the biggest challenges facing food retailers today,” according to Sarasin.

“Panic buying by consumers as a reaction to concerns about product shortages put significant strains on the supply chain at the height of the pandemic, resulting in high levels of out-of-stock items — and a few frustrated shoppers, of course,” she explained. “These perceptions persisted in the minds of consumers throughout 2020 and into 2021. And it’s important to note that while consumer demand has diminished slightly from the early days of the pandemic, when we had pantry-loading and other types of issues going on, shopper demand just has not abated.”

Sixty-five percent of grocery retailers surveyed said a shortfall in trucking/transportation capacity negatively impacted their business in 2020, and 42% expect supply chain disruptions to continue taking a toll in 2021. Results to remedy the situation via more collaboration with suppliers and manufacturers have been mixed. Thirty-one percent of food retailers reported that such efforts have had a positive impact, while 27% described this collaboration as negative.

“It’s fair to say the lack of trucking and transportation capacity — specifically, truck driver and shipping container shortages and massive backups at ports — represents one of the biggest hot-button issues and concerns among food retailers today, with some two-thirds of responding retailers saying trucking and transportation capacity is having a negative impact on their businesses,” Sarasin said. “We anticipate these issues to persist at least through the rest of 2021. These issues have led retailers to reassess their engagement strategies with trading partners, although retailers are evenly split on whether those collaborations are having a positive impact or a negative impact on their businesses.”