Throughout this decade, fresh prepared foods have been a major focus of retailers, driving rapid expansion, increased footprint and ongoing interest. At IRI, we define fresh deli prepared foods as all foodservice items (dips, salads, entrees, meats, etc.) that are sold in the deli department. It excludes deli bulk meats and both service and specialty cheeses but includes all other items in the deli department.
The deli prepared foods section accounts for more than half of all department sales and topped $12.5 billion across the total U.S. multioutlet geography for the 52 weeks ending Aug. 12, 2018. Remarkably, that is an additional $2.5 billion more than in 2013. However, the growth rates have slowed to only 1.9% in the latest period, down significantly from an all-time high 8% sales growth from 2015 and 2016. The reality is, deli prepared foods are facing major headwinds—namely, continued competition beyond the store with expansion in delivery, as well as a plateau in the amount of real estate and renovation that can be done in the store.
The largest barrier standing in the way of accelerated growth of retail foodservice, however, lies within the assortment offered. In a recent analysis, we found that the majority of retail food stores are carrying roughly the same core items as their competition with little diversity. Also, the majority of U.S. retailers have not made major changes in prepared foods they offer their consumers in the past few years. This lack of change has been noticed by consumers, with a telling quote from a summer 2018 IRI fresh foods survey: “I loved [my grocery store’s prepared foods] when it first opened. But it’s been five years and they offer the same meals.”
This continued focus on similar products is evident in the top-selling categories within prepared foods. Deli entrees and prepared meals make up 42% of department sales, with the majority coming from chicken (rotisserie and fried). Salads and appetizers make up another 20% of sales each, respectively. High-growth pockets do still exist in deli prepared foods, with appetizers increasing sales by 8% versus the prior year. Side dishes also added an impressive 10% more sales; however, that’s off a small base of only $290 million. At the segment level, growth trends are also evident of healthfulness (vegetable entrees up 16% and protein salads up 3%), convenience (holiday meals up 18%) and entertaining made easy (variety trays up 6%).
Prepared Foods’ Powerhouse Stats
Despite the slowdown in growth, deli prepared foods has some powerhouse statistics, making it a vital part of the store. This is especially true in light of declining brick-and-mortar foot traffic and increasing fight for market share. According to IRI household panel data across all outlets, including both UPC and random-weight items, nearly 80% of U.S. consumers purchased from the deli prepared foods department last year.
Remarkably, this represents an increase of 1% over an already wide household penetration base. Shoppers are making about 12 trips on average annually, spending $37 in the rest of the store when they buy something from the department. This means that if we were to get just 10% of existing deli prepared foods buyers to make one more trip, it would be worth an incremental $366 million to the store.
That one additional trip for 10% of the buying population may not be that hard to achieve. A deeper dive into deli prepared foods spending habits among various demographic groups revealed several critical household types are drastically underspending in the department today. Households that are led by adults ages 18-34, as well as households with young children, are spending more than $25 less annually than the average household. These groups are likely not finding foods that meet their lifestyles or taste preferences in the current deli prepared foods offering.
Fresh Prepared Foods Annual Sales Trends
Dollar Sales Growth vs. Prior Year
Source: Source: IRI Total Store View + Perimeter
No Kids Meals Means Lost Sales
In short, very few retailers carry deli prepared foods kids meals, even though this is a practice done by the nations’ top performing foodservice retailers. Research on food preferences of young millennials reveals functional foods, unique flavors and transparency/storytelling will resonate most with them. Yet the top-selling categories in deli prepared foods remain the core comfort-food flavors with little holistic health messaging. Millennials also outpace their older generational counterparts in dining out, getting takeout and getting in-home food delivery— making the battle for their dollar even fiercer for retail deli prepared foods.
Millennial consumers have proven they will buy previously prepared meals from the supermarket. The frozen entrees category has seen a renaissance in the past year, with growth rates going from negative to a 3% sales increase. And millennials are fueling the category: The growth rate of millennial spending on frozen entrees was nearly double that of other generations. Furthermore, deli prepared entrees and frozen entrees are not, as we might think, separate trip missions. It is 1.9 times more likely that a consumer will buy a frozen entree on a trip that also includes a meal from the prepared deli than the average trip.
To return to the high-growth heyday of deli prepared foods, retailers and manufacturers need to take a hard look at their existing department strategy. Is your core assortment the same as it was for the past few years? If you have new offerings, are you effectively gaining awareness for them? Do you have foods that resonate with a younger consumer demographic and/or families with young children? The opportunity is significant. A recent division-level analysis at one national grocery chain revealed that just raising each of the divisions to the total U.S. deli sales velocity average meant an addition of nearly $600 million to their bottom line. The key is recognizing that what generated growth even just five years ago may not be true today. Connect with your consumers, get creative with your assortment and consider changes that make your prepared foods products reflect the needs of today’s shopper.
Jonna Parker is principal of IRI’s Fresh Center of Excellence.