How Many Threats Can the Food Industry Handle?

(Note: This is a guest post by Matt Gutermuth, who serves on GrocerKey’s Strategic Advisory Board. Here, Matt shares some of his perspectives on the broad food industry and the forces he sees at work on it today, based on his long experience in the industry.)

From the moment Julia Child entered our living rooms more than 50 years ago, bringing refined French cuisine to the masses, the American palate began changing forever. Today, celebrity chefs receive unprecedented exposure on all forms of media (television, web, social etc.), and names like Bobby Flay, Giada De Laurentis, and Guy Fieri are now as recognizable as superstar athletes and rock stars.

We now have an entire consumer segment of “foodies” that eat out more often, enjoy trying global fare, and are much more educated about the food they consume. They want natural, organic, locally sourced, and clean labels, whether they’re enjoying a meal at their favorite restaurant or shopping their neighborhood grocery store.  In 2016, for the first time in history, retail sales at U.S. eating establishments surpassed those of grocery stores. And there has been a steady supply of new restaurants to meet this demand. In 2001, there were 469,018 restaurants in the country. By 2016, that number had jumped to just over 600,000, an increase of 30%.

But if you dig a little deeper into the restaurant growth story, there are some troubling signs and legitimate concerns about overcapacity — or, dare we say, a “bubble.” According to NPD, in 2016 the number of independent restaurants in the U.S. dropped by 3%, and the overall number of restaurants (independent and chain) fell by 1%. While certain segments of food service are maintaining moderate sales growth, NPD data shows that the casual dining and midscale/family-dining segment continues to be soft. Visits to casual dining restaurants are falling by 4%, and midscale/family-dining establishments lost 3% of their trips during the first quarter of 2017. In addition, consumers are defining “dining out” much differently than they have in the past. Traditional restaurants are losing share to food retailers (etc), convenience stores (WaWa, Sheetz, etc), and meal kit providers (Blue Apron, Hello Fresh, Plated. etc). Many food retailers are now offering restaurant-quality meals at a value price point that can be consumed on-site or brought home. The fastest growing segment of food retail happens to be food service offerings created and sold inside the grocery store. Convenience stores are also beginning to steal restaurant trips with their own food service offerings. If you’ve been inside a WaWa lately, you have probably noticed that it is certainly not your father’s gas station. We are more fascinated with food than ever, and admittedly the majority of us don’t know how to cook. Household celebrity chefs now have other ways to get their gourmet fix, without actually going to a restaurant or a grocery store. There are a growing number of online providers like Blue Apron, Hello Fresh, and Plated that deliver restaurant-quality meals with the prep work already done, and easy-to-follow instructions so that even those of us that struggle to boil water can create terrific gourmet meals in our own kitchens.

Larger Trends

As we look ahead to the next decade, technology will challenge the status quo at traditional grocery chains and restaurants. Today’s consumer has a much different expectation today than just 10 years ago (thank you iPhone, Amazon, and Google). We expect to engage with brands on our terms, the way we choose to, not the way the brand “markets” us to. We expect things now, and customized to our liking.  Amazon can get you what you want, in some cases, within the hour, and Google can provide any answer within seconds. Now that Amazon has entered the food industry directly with its acquisition of Whole Foods, we could see the greatest disruption the food industry has seen in more than 50 years.

Emerging Leaders

The lines between food service and food retail are already blurred and will only become even moreso over time. The daily question we all face — “What do you want to do for dinner?” — was once black-and-white, with “cooking” representing a trip to the grocery store and “eating out” representing a trip to a restaurant. That daily decision is no longer black-and-white, as restaurant-quality meals become a larger, more profitable, and growing segment for grocery stores, convenience stores, and meal kit providers. Leading the way is Wegmans, which has unseated both Publix and Trader Joe’s as America’s favorite grocery chain. The research firm CRC projects that five years from now prepared foods will represent 6.7% of grocery store sales, up from just 1.7% five years ago. CRC predicts that prepared food sales could exceed $65 billion in annual sales just five years from now. Today, “going out” to eat no longer exclusively means a trip to your local restaurant, but is becoming more likely to be a Wegmans, Whole Foods, HEB, or any number of other traditional grocery retailers that continue to improve their prepared offerings each and every day. Every dollar spent on prepared meals, and every trip made to “dine out” in traditional grocery outlets, represents a lost opportunity for the food service channel.  Food retailers have been successful at growing food service because they meet all the essential elements that drive consumer behavior, which, according to NPD’s Warren Solochek, include “convenience, quality food, value, and a positive experience.”

Lessons from Walmart

When Walmart entered the grocery business, there was a good bit of skepticism, with established grocery chains scoffing at the notion that a big-box, non-food retailer could possibly be successful selling food. “They don’t know our business” and “food is much more difficult than TV sets” were common perspectives of food retailers at the time. But Walmart proved to be a fast learner, launching its first Supercenter in 1987. It’s now the largest “grocery store” in the country, with more than 21% market share of the U.S. traditional grocery industry. Walmart’s mastery of supply chain and logistics, honed over previous decades, enabled it to execute on its mission of “Save Money, Live Better” and changed how consumers bought their groceries. It became, in essence, a supply chain and logistics company with stores that sold food. Its inventory management and cost controls continue to be the envy of the industry, and create a significant competitive advantage. It has forever changed how products are sourced, transported, and priced on the shelf. Walmart’s size and scale, coupled with its unmatched supply chain and logistics expertise, has put enormous pressure on traditional food retail competitors, and in many ways changed how consumers shop for food.

The Future with Amazon

Perhaps an even more disruptive force in the industry today is Amazon. Arguably, Amazon has the most robust household information of any retailer in the world (brick & mortar or online). Consumers today require customization and want personalization, and Amazon is poised to deliver both in a way that other retailers can’t and won’t be able to for some time. Couple its knowledge of the consumer with a supply chain and logistics expertise that rivals Walmart’s, and it is not a stretch to suggest that Amazon is a formidable threat. Much of what we heard in the ‘80s when Walmart entered the food business we are now hearing again in reference to Amazon’s desire to win in food. Now that the acquisition of Whole Foods is complete, Bezos has already done what most naysayers claimed he couldn’t do — quickly scale a physical food presence across the United States. With more than 450 stores (mini distribution centers), located in sought-after locations (affluent neighborhoods), he’s done just that. So, what does this mean for the industry, and what players will be impacted the most? Food retail? Food service? The short answer: both of the above. Amazon’s move into this space is an absolute game-changer, and the impact will be felt across the food landscape for years to come – in both restaurants and grocery stores.  Amazon will unleash its superior household-level insight along with its supply chain and logistics expertise to once again change how the consumer shops and interacts with food, much like Walmart did in the ‘80s and ‘90s. In addition to its operational advantages, Amazon doesn’t have to play by the same rules on Wall Street as its competitors do. This may change over time, as Amazon continues to grow, but today its profit expectations are very different from other food industry companies trying to compete, freeing them up to take risks others can’t.

Amazon is betting it can innovate faster and execute better than the incumbents, by using its technology, knowledge of the consumer, and supply chain and logistics advantage to change how both consumers and culinarians purchase and interact with food. It has redefined choice and convenience for consumers in the online world — and who’s to say it can’t do the same in food service or food retail? Amazon has already built out local distribution centers that enable same day delivery of merchandise. How soon will it scale up food delivery to the home? When does it start supplying directly to restaurants? Price transparency, convenience, and choice are not easy things to get in the food service world today, but are becoming an expectation of consumers everywhere. These same consumers are chefs and restaurant owners and will welcome the transparency and ease of doing business that Amazon can provide. In addition, most of these culinarians are probably already Prime or Amazon business customers (more than 50% of U.S. households are Prime members). Can they deliver the impossible: size, scale, highly differentiated offerings that are personalized? I would not bet against them.

Realities – Front and Center

In the face of this relatively new and formidable threat, coupled with a more educated and demanding consumer, food retailers, restaurants, and the entire ecosystem that supports and supplies them must reevaluate everything they do. It has always been important to start with the consumer – but, in today’s environment, consumers have more control than ever before, and the failure to keep up with them will be devastating. If you are a food company that does not have the consumer front and center — in how you operate every single day, not just in a company slogan or mission statement — you will struggle to compete and survive in this new world. Amazon operates each day with a “Day One” mindset. This approach to the business enables it to move quickly and provide consumers with things they didn’t even realize they wanted. There is a rather large segment of the food industry just now building online ordering capability and an omni-channel strategy. Amazon is already there and is close to taking “ordering” completely out of the equation with automated replenishment. Satisfying a very different consumer and competing in this new digital world will require new thinking and bold leadership. Ask yourself, is the product or service you provide fast, convenient, transparent, and easy? If not, that is a gap Amazon will exploit. Ask yourself, are your consumer performance standards high enough, and are you delivering on those standards at a rate that will enable you to compete in the future. If not, you need to challenge your existing metrics as they pertain to the consumer or customer. Being “good” is simply not enough when the expectation is “great.” The most important first step is the realization that the competitive landscape has shifted dramatically and only those able to adapt and change will survive.

There is some time to react, but the clock is definitely ticking.

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Matt Gutermuth, GrocerKey strategic advisorAbout the author: Matt Gutermuth was the CEO of Safeway.com and later served as a senior executive at Winn Dixie and Sysco.

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