Another year of relatively slow growth, tight margins and increasing competitiveness for retail grocery defined 2019. The industry is caught between the need to invest in order to grow and its natural inclination to minimize risks. Knowing “where the puck is headed” and being among the first to skate to it confidently is key to gaining market share and growing margins for food retailers. In 2020, it is predicted that three major trends will stand out, while representing significant opportunity for bold grocers to tap into. Here is what to expect.
The Continued Surge in Plant-Based Proteins
The broad introduction and consumer acceptance of a handful of plant-based protein retail SKUs, concentrated in ground beef, made big waves in 2019; 2020 will be the year that plant-based proteins expand in two key directions: 1) more cuts will be mimicked; and 2) additional proteins will be imitated. Sustainable growth for plant-based proteins will result from the introduction of products that taste and cook like their animal counterparts and that are priced similarly enough to them so a broad consumer base will eat these options regularly.
It is believed that research will show that plant-based proteins will directly increase the overall consumption of protein, but it is also believed that traditional animal-based protein producers will see plant-based proteins as dire competitive threats. Consumers, however, will continue to see plant-based proteins as good for the planet and good for themselves. Bottom line, grocers that make a commitment to stocking and merchandising plant-based proteins will see sustained returns.
Online Grocery Last-Mile Innovation
These days, almost every food retailer has accepted that succeeding in online grocery is very important to their long-term vitality. Yet achieving online grocery profitability has proven difficult or impossible for food retailers, due to high capital and operating expenses compared to running traditional self-service brick-and-mortar stores. 2020 will see continued last-mile innovation, including the identification of multiple money-making fulfillment paths.
There will be three keys to making these breakthroughs: 1) evaluating customer profitability vs. order profitability; 2) reallocating trade promotion spending differently to invest in online grocery; and 3) revising the mix of online sales to emphasize proprietary, high-margin businesses such as signature prepared-food offerings.
Measuring success by customer profitability is important because, for "click and mortar" food retailers, online shoppers buy more from the retailer overall, including in-store. They are also less price sensitive. The presence of online shopping enhances these customers’ total engagement with the retailer.
For many manufacturers, trade promotion is at best a breakeven proposition financially. And, in many staple categories (e.g., paper goods trash bags), promotions have little impact on overall product consumption. A reallocation of trade spend to subsidizing home delivery fees for consumers who choose automatic replenishment can drive loyalty and profitability for manufacturers and click-and-mortar retailers alike.
Increasing online orders’ gross-profit contribution can also contribute to online grocery profitability. Prepared foods sold in-store can command gross margins that are nearly double that of center-store products, and if they’re signature dishes, they’re tough to price compare online. Making prepared foods a centerpiece of online grocery strategy will help “fix the mix.”
Store Location and Design
Traditionally, grocers’ real estate strategy stressed suburban and exurban locations that had cheap land for big stores and ample parking, so they could be first in growth areas. Today, many consumers are living closer to downtown areas, creating both an opportunity and a challenge for retailers to succeed with smaller footprint stores and meet urban shoppers’ desires for fresh prepared foods that are available for pickup and delivery. 2020 will see lots of urban format experimentation as traditional operators look to follow consumers back to the city: Online ordering and home delivery to much smaller trading areas and convenience meals will be of high interest for these urban stores.
It has never been more difficult to succeed as a food retailer than it is today. Yet the keys to success haven’t changed much over the years: Listen to your customer, develop a keen understanding of the differences between fads and trends and don’t be afraid to be the first to market. Increased share and profits in 2020 can be your reward.
Jim Hertel is SVP of analytics research and development at Inmar.