The Grocery Industry expects revenue to increase at an average annual rate of 1.0% to $6111.9 billion over five years to 2017, including a .2% increase in 2017.

Industry Analysis: Grocery
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Ohio University

Executive Summary
The Grocery Industry expects revenue to increase at an average annual rate of 1.0% to $6111.9 billion over five years to 2017, including a .2% increase in 2017. (IBISWorld, 2017) This industry is becoming more technologically advanced and we are beginning to see companies utilize Business Analytics to get closer to the customer and understand the purchasing patterns. With the increase of technology, grocery stores are trying to make shopping at their stores an enjoyable activity. With the implementation of self-checkout lanes, customers will not have to wait as long while at the store. Grocery stores are gaining market share through mergers and acquisitions as well as re-investing into their own business and opening new stores. Consumer habits are changing; one habit that grocery stores are anticipating is the change to a healthier life style and organic food.

With the new technology, consumers are beginning a new trend of online ordering. This concept has already hit the stores with many consumers giving positive feedback and continuing to order online for their groceries weekly. Amazon had recently acquired Whole Foods Market, which allows them to get closer to the customer for delivering groceries. Kroger has implemented ClickList, which has been a big success so far, is looking at ways to deliver products to consumers as well. Wal-Mart continues to be a treat in the industry as they keep prices lower than many of the grocery stores.

The three companies with the most market share in the industry are Kroger, Albertsons, and Publix. Albertsons has used mergers and acquisitions to grow in the Mid-Atlantic area, which has the highest population to establishments. Kroger has also gained market share and success through mergers and acquisitions. Publix has re-invested their money into themselves and have opened up stores in the Southeast, which is the second largest region.

Key External Drivers

Technology
Business Analytics
In today’s environment, it is important to stay one step ahead of your competition. In an industry where competition is a constant, companies need to look for ways too influence a customer to shop at their store. By utilizing big data these companies are able to understand consumer-buying patterns through the use of a loyalty card and credit card and can anticipate shopper’s needs ahead of time. “Grocers can pinpoint customers who are likely to jump to another store and engage them in efforts to keep their business” (Big data, 2015). By understanding certain data points, analyst can predict whether a shopper is about to change stores or see what items they will be shopping for next. Once the data has been shifted through, advertising associates will tailor coupons that are personalized and that they believe you are going to purchase next and deliver that information to your door or through your phone. Kroger is one of the companies that has began shifting through this data, “regular customers at Kroger redeem nearly half the coupons the retailer sends out, which is far higher than the average trend of 1% to 3% redemption” (Manthan, 2017). It is important in this industry to deliver not only low prices to customers, but an exceptional service as well. Business Analytics allows these companies to offer that superior service.

Increasing Mobile Technology
There has been an increase in e-commerce among millennials, and in both generations X and Z (Refer to Appendix A). This is due to the increasing access to computers and smartphones. While only a small portion of shopping is occurring online, it is growing among all generations. The ability to shop for your groceries at any point of the day has fascinated many customers and they are beginning to slowly pursue this idea of online shopping. There has become a rise in self-checkout lanes in the industry as grocery stores are now implementing in most of their stores. Roughly 41% of consumers are already using these self-checkout lanes and another 45% are willing to use the service (Refer to Appendix B). The industry is in the beginning stages of free delivery to your doorstep, the current issue at hand is the cost of the last mile from the grocery store to the customer. In a recent study by bringg, it showed that “28% of the total delivery cost to a business comes from the last-mile” (Bringg, 2016). This large percentage can come from many different variables such as inconsistent demand from consumers or expectations for same day delivery. Mobile technology has given consumers the ability to shop online at any time of the day; it has created ease of shopping at self-checkout lanes, and finally it has transformed grocery delivery to your home.

Demographic
Proximity to Key Markets
In the grocery industry it is critical that you locate your stores near a highly populated area in order to maximize revenue. As companies look to gain market share through mergers and acquisitions, a key variable that they look at is whether the stores are located near a key market. In regards to distribution of establishments compared to population the Mid-Atlantic region accounts for 26.1% of establishments. The states in this area include New York, New Jersey, and Pennsylvania. This area has been known to be the most important region in the industry (IBISWorld, 2017). Albertsons has a large market share in this region, followed by Kroger. Many of the acquisitions by these companies were strategically thought out to maximize revenue. The Southeast is the second most concentrated area, which accounts for 22% of establishments in the grocery industry (Refer to Appendix C). Publix has a large portion of the market share in the Southeast, specifically Florida. The top three grocery stores in regards to market share have a high concentration in these two regions.
Sociocultural
Healthy Life Styles
There has been over a 15% increase in the number of people who bought organic food in the United States since 2010 (Refer to Appendix D). Many of the grocery stores have already been stocking healthy food at their stores as well as creating a better ambiance around the shelves that will be storing it. There are a few stores that have started placing a dietitian on site to field any questions. The industry is going to have to tighten their supply chains, as many of these organic products do not have a long shelf life compared to the non-organic items. Global Sales of these healthy food products are expected to reach $1 Trillion this year (Refer to Appendix E). This will be a record high for sales for healthy food, as grocery stores begin planning their stores to adhere to their customers.

Porters Five Forces

Threat of Substitutes
The threat of substitutes in the grocery industry is high. The substitutes in this industry include Amazon and Wal-Mart. Shoppers can decide to shop online with Amazon and have their groceries delivered to their door (Not everywhere yet). Amazon recently purchased Whole Foods Market for $13.7 billion (Grocery Stores & Super markets, 2017). The Whole Foods market deal solidifiesthat this substitute is readily available and has plans and gain market share fast. With this purchase Amazon is getting closer to the customer and closing in on the last-mile of delivery. Wal-Mart is the largest food retailer in the United States and has approximately 22% of the U.S. grocery market (Grocery Stores & Super markets, 2017). Wal-Mart is a substitute that is attractively priced and is now beginning to offer a delivery service in some cities. This force has a heavy impact on the industry and will continue to challenge these grocery stores.

Bargaining Power of Buyers
The bargaining power of buyers in the grocery industry is high. In the industry sellers’ products are undifferentiated which does not limit the bargaining power of buyers. Many grocery stores in the industry sell nearly identical products and can be purchased at nearly all stores. Also buyers have the ability to integrate backwards into the business of sellers. For instance, many of these grocery stores have their own private labels in which they can offer lower prices than the brand named offerings. Another example of backwards integration is when Giant Eagle purchased Riser Foods for $403 million (Bloomberg News). This allowed for Giant Eagle to own one of their main produce suppliers.

Bargaining Power of Suppliers
The bargaining power of suppliers in the grocery industry is low. There are good substitutes for supplier products. In many cases a grocery store can access nearly all their good from a number of suppliers as long as the supplier believes that the grocery store is doing well. In regards to food providers they are in most situations looking for grocery stores to buy their products. It also would not cost a grocer to switch to an alternative supplier.

Threat of New Entrants
The threat of new entrants in the grocery industry is high. Entry barriers in this industry are low; Lidl just introduced new grocery stores on the East coast in June this year. Lidl already has 30 storefronts and is aiming for 100 by mid-year in 2018 (Selyukh, 2017). There is also the introduction of Amazon through the purchase of Whole Foods market. Industry members are unable to strongly contest with the entry of a new comer for both Amazon and Lidl resulting in a high threat of new entrants.

Intensity of Rivalry
The intensity of rivalry in the grocery industry is moderate. Sales are concentrated among a few large sellers. Kroger, Albertsons, and Publix maintain a large portion of total industry market share. While there are numerous grocery stores out there, the majority of sales are captured by these 3 companies, which shows a weak rivalry. On the contrary, the products of industry members are weakly differentiated which would suggest a strong intensity of rivalry. Overall the intensity of rivalry is moderate.

The Kroger Company
Kroger is the largest traditional grocer and operates over 3,900 stores throughout the United States (Hoovers, 2017). Kroger has been active in continuing to improve through mergers and acquisitions. They have been able to enter new markets and continue to provide a service that competes with local grocers. Kroger was involved in one of the largest acquisitions in the grocery industry when they acquired Harris Teeter Supermarkets Inc. for $2.44 billion; this added an additional 212 stores in the Southeast (Jargon, 2017) With this purchase, Kroger began to signify that they were going to be one of the largest grocers in the United States. After this acquisition their competition began to mirror this strategy of growing through acquiring larger developed companies. In late December of 2015 Kroger purchased a Milwaukee-based grocer Roundy’s for $178 million, allowing them to tap into the Mid-West market (Hoovers, 2017). After completing the sale, Kroger now had locations in Illinois and Wisconsin giving the company a total market share in 35 states. The company’s long-term strategy is to continue to grow its market share. Kroger has 16% of the current market and over the 5 years to fiscal 2017, Kroger’s industry specific revenue is expected to increase at an average annual rate of 4.7% to $97.8 billion (IBISWorld, 2017). This has solidified Kroger as the largest traditional grocer in the United States. This success is largely because of the strengths that Kroger possesses including their ability to sell their own private label brands. Kroger also operates 38 food production or manufacturing facilities, giving them the ability to get products to consumers fast. With the many acquisitions of companies in previous years and other activities, Kroger is faced with $9.6 billion dollars of debt on its balance sheet (Dalavagas, 2017). This is the main weakness of the company and it may hinder them from acquiring more companies. Kroger is going to be facing many obstacles in the next few years, as there will be more non-traditional rivals entering the market. Kroger will continue to succeed as a dominant force in the industry and have been showing initiatives such as ClickList, where you can pick up your online order of groceries at your nearest Kroger.

Albertsons
Albertsons is the second largest grocer in the United States. The company controls over 2,200 stores across 34 states (IBISWorld, 2017). Albertsons has been able to build their business through mergers and acquisitions. Albertsons acquired rival company Safeway in April of 2014 for $9.4 billion (Reuters, 2017). By acquiring Safeway Albertsons was able increase market share as well as a greater geographic range of stores. The acquisition also doubled their annual revenue and presented an opportunity to utilize Safeway’s IT system. Albertsons strategy is similar to that of Kroger’s, which is to increase market share by acquiring companies throughout the United States. In 2015 they acquired 76 stores from A&P. Albertsons continued to expand that following year by acquiring 29 stores from Haggen for $106 million (Hoovers, 2017). Albertsons strengths include that it offers free home delivery and discounted coupons. They also have a large portfolio of private label brands that allows them to differentiate themselves from other competitors. One of the weaknesses in the company is that it struggled in 2016 with a net loss of $373.3 million (Hoovers, 2017). Although this was mostly based on higher sales and income tax benefit, Albertsons needs to consider going public to raise capital. In order for this company to succeed in the future it is going to have to go public, until then they will not be profitable.

Publix
Publix is based in Florida where close to 760 of there 1,130 stores are located. The remaining stores are located in the remote southeast and up the eastern coast. Publix has eight distribution centers and seven are in Florida and the other in Georgia (Hoovers, 2017). Publix strategy has been to grow through new store openings. In this industry it is more common to have a growth strategy revolved around either mergers or acquisitions. This company has been able to continue to grow by investing its revenue into opening new store or by remodeling out dated stores. This is considered to be one of their strengths, re-investing back into the company. Publix consistently is known for their renowned customer service. Publix also announced last year that they would be partnering with Starbucks to place Starbucks kiosks in their stores (Kritzer, 2016). This is expected to increase foot traffic in stores. A weakness of Publix is that they have a price range that is neither flexible nor affordable for everyone. In the five years leading up to 2017, the company’s revenue is anticipated to increase at an annual rate of 4.3% to $33.9 billion (IBISWorld, 2017). The company continues to see success and have even began a new organic brand called, GreenWise. With the constant growth that Publix has seen the past several years; it is clear that they will continue to grow and develop an increase in market share.

Collective Attractiveness

Incumbent Firms
As an incumbent firm, if you do not have over 5% of market share than I would suggest selling your company to one of the top three (Kroger, Albertsons, or Publix). With the oncoming competition of Amazon and the introduction of online grocery shopping, it would be difficult to succeed in this climate. On the contrary if I were one of the top three firms (Kroger, Albertsons, or Publix), I would stay in the industry and continue to develop more market share either through mergers and acquisitions or re-investing in myself. The threats that are present in the industry include; Large Companies Dominate, and the Reliance on pricing discounts and promotions to drive volume and shrinkage. It wouldn’t seem feasible for a small company to stay in the industry. Many of the Opportunities include; loyalty programs, the increased demand for healthy foods, private label growth, and delivery to the door. (Grocery Stores & Super markets, 2017) Many of the large companies could overcome these threats but the smaller ones would have a tough time in this climate.

Reference Page

McClearn, M. (2015, June 19). Big data is changing grocery | Marketing Magazine. Retrieved from http://marketingmag.ca/brands/big-data-is-changing-grocery-149735/

Manthan. (2017). Top 3 Grocery Retail Strategies using better shopper insights | Manthan. Retrieved from https://www.manthan.com/cpg-solutions/insights/503-top-3-grocery-retail-strategies-using-better-shopper-insights-1

Hoover’s Inc. (2017). The Kroger Co. Retrieved October 8, 2017 from Hoover’s database.

Jargon, J., & Gasparro, A. (2013, July 9). Kroger Tastes Go Upscale as it Buys Harris Teeter for $2.44 Billion – WSJ. Retrieved from https://www.wsj.com/articles/SB10001424127887323368704578595310330531012

Hurley, M. (2017). Supermarkets & Grocery Stores in in the US (Industry Report 44511). Retrieved October 6, 2017, from IBISWorld database.

Dalavagas, I. (2017, January 12). SWOT Analysis: The Kroger Company. Retrieved from http://valueline.com/Stocks/Highlights/SWOT_Analysis__The_Kroger_Company.aspx#.Wdz_cROPInU

Reuters Staff. (2014, March 6). Cerberus Capital to buy Safeway for about $9.4 billion | Reuters. Retrieved from http://www.reuters.com/article/us-safeway-deal/cerberus-capital-to-buy-safeway-for-about-9-4-billion-idUSBREA252AD20140306

Hoover’s Inc. (2017). Albertsons Companies, Inc. Retrieved October 8, 2017 from Hoover’s database.

Hoover’s Inc. (2017). Publix Super Markets, Inc. Retrieved October 8, 2017 from Hoover’s database.

Kritzer, A. (2016, September 16). Publix to begin testing Starbucks kiosks in stores. Retrieved from https://www.bizjournals.com/tampabay/news/2016/09/13/publix-to-begin-testing-starbucks-kiosks-in-stores.html

Bringg team. (2016, March 6). 4 Challenges of Last Mile Delivery for eCommerce. Retrieved from https://www.bringg.com/blog/insights/4-challenges-of-last-mile-delivery-for-ecommerce/

Grocery Stores and Supermarkets. (2017 February 16). Retrieved from First Research database

Bloomberg News. (1997, May 15). GIANT EAGLE TO BUY RISER FOODS FOR $403 MILLION – The New York Times. Retrieved from http://www.nytimes.com/1997/05/15/business/giant-eagle-to-buy-riser-foods-for-403-million.html

Selyukh, A. (2017, September 27). Discount Grocers Aldi And Lidl Give U.S. Stores A Run For Their Money. Retrieved from http://www.npr.org/sections/thesalt/2017/09/27/552384150/discount-grocers-aldi-and-lidl-give-u-s-stores-a-run-for-their-money

Appendixes

Appendix A

Nielsen. (2015, April). The Future of Grocery. Retrieved from https://www.nielsen.com/content/dam/nielsenglobal/vn/docs/Reports/2015/Nielsen%20Global%20ECommerce%20and%20The%20New%20Retail%20Report%20APRIL%202015%20(Digital).pdf

Appendix B

Nielsen. (2015, April). The Future of Grocery. Retrieved from https://www.nielsen.com/content/dam/nielsenglobal/vn/docs/Reports/2015/Nielsen%20Global%20ECommerce%20and%20The%20New%20Retail%20Report%20APRIL%202015%20(Digital).pdf

Appendix C

Hurley, M. (2017). Supermarkets & Grocery Stores in in the US (Industry Report 44511). Retrieved October 6, 2017, from IBISWorld database.

Appendix D

Nielsen Scarborough. (n.d.). Number of people who bought organic food in the United States from autumn 2010 to spring 2017 (in millions). In Statista – The Statistics Portal. Retrieved October 6, 2017, from https://www.statista.com/statistics/228377/people-who-buy-organic-food/.

Appendix E
Hudson, E. (2012, November 29). Health and Wellness the Trillion Dollar Industry in 2017. Retrieved from http://blog.euromonitor.com/2012/11/health-and-wellness-the-trillion-dollar-industry-in-2017-key-research-highlights.html