At a conference at GroceryShop 2023 in mid-September, Moses, a partner at Solomon Partners, pointed out in his speech that non-traditional food retailers have gradually eaten away at the share of traditional supermarkets over the past 20 years.
Non-traditional food retailers refer to retailers who started from selling non-food products and gradually joined the food retail business after developing to a certain scale, including shopping malls, warehouse membership stores, discount stores, dollar stores, drug retail stores, specialty stores (including specialty stores serving specific ethnic groups, such as Italian supermarkets, Chinese supermarkets, etc.), *retailers, etc.
1. Changes in 20 years
In 2003, 10 of the 15 largest grocery retailers in the United States were supermarkets. In the top five, Walmart is in first place with a 16% share, followed by Kroger with 11%, Albertsons (7%), Safeway (6%), and Ahold USA (5%). At this time, Costco and Target are not focusing on food retail, and Winn-Dixie and A&P are still the top supermarkets. By 2023, 10 of the top 15 grocers are non-traditional food retailers. Among the top five companies, Walmart leads with a 29% share, Kroger (10%), Costco (8%), Albertsons (6%) and Amazon (5%) (see Figure 1).
Today, non-traditional food retailers without unions account for 63% of the market, compared to 37% for traditional supermarkets (see Figure 1), and there are no national enterprises. These national retailer discount stores are the primary food supply purchase channel for 62% of shoppers, compared to 38% for supermarkets. Back in 2003, only 21% of national retailers had discount stores, and supermarkets were the food purchasing channel for 79% of consumers (see Figure 2).
Figure 1 Top 15 food retailers in 2023 by sales and market share (in billions)
Note: 10 (pink background) are national retailers discount stores, and white background is supermarket.
Scott Moses Solomon Partners, Report"u.s. grocery: a few things you might not know" .
Figure 2 Changes in consumers' main shopping channels (2003 vs 2023).
Scott Moses Solomon Partners, Report"u.s. grocery: a few things you might not know" .
2. Why did it come to this?
Over the past 20 years, three significant factors have transformed the food retail industry. First, national retailers and discount stores increased by almost 390,000 stores, more than doubling their total number of stores, and still eroding less than 260,000 stores with a market share. Consumers have more choices than ever before, and as a result, second, consumers typically shop from four types of food retail channels and five retail brands. Third, online food retail sales quadrupled. Walmart, Target, Costco and Amazon lead the way in this regard. ”
Walmart is the largest food retailer in the United States. More than 90 percent of Americans live within 10 miles of a Walmart store, which has $300 billion in food retail operations in the United States. Its food retail sales have quadrupled over the past 20 years. That's three times that of Kroger, and $200 billion more than Kroger;That's more than three times that of Costco, five times that of Albertsons, and five times that of Amazon. ”
1.Non-traditional food retailers are growing faster than supermarket sales and the number of stores is growing more
According to an analysis by Solomon Partners, from 2003 to 2023, among the top 15 food retailers in the United States, non-traditional food retailers increased sales by $511 billion, an increase of 389%, which is 35 times, supermarket sales increased by only 91%. The difference in the number of stores is even more pronounced. In 20 years, the number of outlets of national retailer discount stores has increased by 145% to a total of 38,951, which is 96 of the 402 stores added by supermarkets9 times, the number of supermarket stores increased by only 5% (see Figure 3, Figure 4).
Costco is the third-largest food retailer in the United States, with more than $90 billion in food sales, and sells the same food as supermarkets, only in larger packaging. Costco's domestic food sales have tripled over the past 20 years, with an average of 1$5.5 billion. That's the equivalent of $3 million per week, which is three times the size of a good supermarket store and five times the average level of operation. Costco is valued at $240 billion, which is 40% higher than the combined market capitalization of all publicly traded supermarkets and ** merchants. The market clearly sees it as a great food retailer.
Discount stores are undeniably food retailers,** the same food items as supermarkets, but in smaller packages. Dollar General now has more than 190,000 stores, up from 6,000 in 2003, plans to increase to 340,000. More than one-third of all U.S. stores that opened in 2021 and 2022 were dollar stores, with Dollar General alone opening 2,060. Dollar General and Dollar Tree Family Dollar together have a $50 billion food retail business with 350,000 stores.
ALDI is the first in the world.
Third, Europe's second-largest food retailer has also driven the expansion of its U.S. business. It has grown from about 680 stores in 24 states in 2003 to about 2,800 stores in 38 states, including 400 Winn-Dixies stores it is acquiring. More stores than Kroger (2,719 stores directly and indirectly operated as of January 28, 2023).
Figure 3 Value added and growth rate of food sales of the top 15 retailers (2003 vs. 2023) in billions of US dollars.
Scott Moses Solomon Partners, Report"u.s. grocery: a few things you might not know" .
Figure 4 Value added of food sales by the top 15 food retailers over a 20-year period (in billions of dollars).
Scott Moses Solomon Partners, Report"u.s. grocery: a few things you might not know" .
2.Supermarkets have failed to take the lead in the online retail sector
Non-traditional food retailers also dominate another area: online retailing. Amazon's Whole Foods and Walmart's Sam's Club are leading the way, with online food penetration rates of 68% and 65%, respectively. Target and its shipping arm, ShiPT, ranked third with 28% penetration, followed by Kroger (14%), Ahold Dehelhaize USA (14%), ALDI (11%), Publix (9%), Albertsons (6%) and BJ's wholesale club (5%)。
Amazon continues to be the dominant company in the U.S. food retail industry, both online and offline. According to research by Solomon Partners, Amazon's market valuation is 1$6 trillion, more than $1 for all other publicly traded food retailers in the United States$2 trillion combined. The online retail giant is valued at 3x Walmart, 6x Costco, 34x Ahold Delhaize, 37x Kroger and 71x Albertsons.
Instacart, a grocery delivery company, completed its IPO and went public in September 2023. Serving millions of households through 1,400 retailers and 80,000 stores, Instacart covers 95% of North American households, bringing unprecedented food choices to the nation.
3.Supermarkets are at a disadvantage in their ability to raise funds
The biggest online food retailers are not supermarkets, they are Walmart, Target, Costco, Amazon. They all have credit ratings of AA and A. Because of this, this gives them an almost limitless ability to invest in **, wages, marketing, logistics, and technology – far more than any supermarket. The best example of this is that Walmart's more than 200 fulfillment centers across the U.S. allow it to fulfill nationwide. With them, Walmart's sales in the second quarter accounted for 36% of U.S. online food retail sales. Amazon has more than 400 fulfillment centers, more than 1,000 distribution points (hubs) and sorting facilities.
4.Supermarket profitability declined
Twenty years ago, EBITDA (earnings before interest, taxes, depreciation and amortization) margins were 75% higher than in 2019, but every supermarket had to lower its ** and gross margins to compete with fast-growing national food retailers. Kroger's gross profit margin is actually much lower than Amazon, Walmart, Target, Dollar General, Dollar Tree Family Dollar, or any other listed supermarket.
Why?Twenty years ago, Kroger saw the growth of Walmart, Target, Costco and other national retailer discount stores, introducing a customer-first philosophy. Since then, they've been investing in better**, both in their original stores and in acquired stores like Harris Teeter and Roundy's.
Kroger's total revenue has fallen by more than 5% over the past 20 years, while Amazon, Ahold, Walmart and Dollar General have all risen. As a result, Amazon, Walmart, and Costco are vastly different from EBITDA compared to all the others. This is important and is key to competition in the retail industry: EBITDA and valuation drive asset liquidity;Drive the ability to acquire and retain customers. The bankruptcy of Sears and KMART is a prime example of this.
Kroger's EBITDA is No. 6 among U.S. food retailers, and Albertsons is No. 10. The logic of valuation is the same, with Kroger in 8th and Albertsons in 12th.
Food retail is a global industry. Kroger and Albertsons are the 9th and 10th largest food retailers in the U.S. by number of stores worldwide.
5.Trade union members have lost their jobs, and the market share of supermarkets organized by trade unions has declined
The success of the national retailer discount store in the market also means the loss of union jobs in the food retail industry. According to research by Solom Partners, about 50% of food retail jobs in the 15 largest grocery stores in 2003 were union members and 50% were non-union members, but by 2023, union members' share of jobs has dropped to 15 percent, compared to 85 percent of non-union jobs.
Non-unionized national retailers saw an increase in market share (22%), mainly led by Amazon Whole Foods (+5%), Costco (+4%), Target (+2%), Dollar General (+2%), Aldi, and the awaiting Winn-Dixie (+2%), Trader Joe'S, Dollar Tree Family Dollar, Walgreens and CVS +1% each, plus non-union supermarkets Publix and H-E-B +1% each. In contrast, Kroger's market share fell by 1 percent, Ahold Delhaize USA by 2 percent, and Albertsons by 7 percent during those 20 years.
Third, Amazon's potential remains unleashed
Moses quoted Amazon CEO Andy Jessy as saying at the quarterly earnings conference that "the company has a large and growing food retail business, but has yet to develop the right food retail model, including brick-and-mortar stores".
Now, Amazon apparently has had the same epiphany as Walmart did 30 years ago: "If you want to be the number one retailer in the world, you have to be the number one food retailer," Moses said. But by Jassy's own admission, Amazon hasn't figured out food retail yet. So given their financial capabilities, given their clear commitment to leadership in the food industry, that begs a simple question: how does food retailing evolve when they discover the right way to retail food?
References: 1] Scott Moses12 things you might not know about the u.s. grocery industry. supermarket news. sep 26, 2023.
2]russell redman. non-traditional grocery retailers pose ‘existential threat’ to supermarkets. winsight grocery business. sep. 21, 2023.