There’s never been a six months quite like the past six months in the grocery industry. Thrust into serving as the “essential” businesses they were born to be, stripped of competition by shut-down or hobbled rivals from the food-away-from-home sector, and already rolling in sales when federal stimulus funds arrived for consumers that despite a worsening economy had few places other than food stores in which to spend, same-store sales—which in a good quarter barely outpaced inflation—suddenly shot upwards of 20%. Inflation, estimated by some retailers to be slightly more than 4% in the second quarter, in many cases passed right through to shoppers.
While this triple sales windfall came at considerable risk of operating amid a deadly and costly pandemic that triggered strains in operations and the supply chain, new consumer shopping habits established in this period gave many operators confidence of structural change portending longer-term trends favoring their strength, particularly for the traditional supermarket format: A radical shift in the share of meals consumed at home amid an uncertain future for restaurants, consolidation of shopping trips, and an acceleration of e-commerce demand bringing volume growth to a point where serving it profitably isn’t quite the fantasy it was way back in February.
As illustrated below, which details same-stores sales figures for retailers that have reported second-quarter (calendar) financials through Sept. 11 , this period brought a blessing of momentum for all in the food-at-home game, but some more than others.
Q2 Comps, Ex-Fuel
When assessing the “winners and losers” of the above, a few truths of the Pandemic Era become evident:
Supermarkets Are Doing Just Great
It’s long been fashionable to predict the demise of the humble supermarket—we do it ourselves sometimes. They lack the sex appeal of specialty players, the pricing strength of discounters and often look doomed to succumb to the firepower of omnichannel megaplayers such as Amazon and Walmart. While those perceptions may well survive the pandemic, COVID also revealed the supermarket’s longstanding but underappreciated aspects—namely, their wide assortments, their location density and their boring-but-effective reliability. If nothing else, the supermarket has proven once again to be a remarkably resilient retail format. When the performance of Weis Markets could be the envy of Amazon, that’s something.
Intuitively, a disease making it dangerous to leave one’s home would favor virtual food shopping, but the channel seems lucky at some level that even native e-tailers ultimately lacked the infrastructure to truly absorb all that demand, forcing shoppers to get the necessities where they knew they could. It was here that despite a drop in traffic that supermarkets shined, making the most of reduced trips through their wide selections and locations closer to shoppers’ homes than mass or club stores. It wasn’t so much convenience but availability that drove sales: Supermarkets are vehicles that work best when wide inventories turn fast on visits from loyal shoppers who pick their own goods. That’s precisely what they were designed to do.
Sales Momentum Makes Everything Better
With higher sales volumes—and a concurrent drawback in promotions—comes waste and markdown reduction, advertising savings and leverage on fixed costs, flowing right to the bottom line. Most saw margins and profits improve, and some dramatically so.
Well-run supermarket retailers have historically demonstrated they know what do with profits: Some of it goes to employee bonuses and raises, some to tackle the soaring expenses associated with keeping stores clean and safe, but a lot of it can go right back into stores in the form of more competitive pricing, deeper connections with shoppers, and store growth and renewals, while fueling investment into suddenly more promising omnichannel efforts and technologies aiding efficiency and loyalty. Retailers such as Ahold Delhaize and Albertsons Cos., for example, said they would be stepping up the pace at which they roll out pickup availability at their units, a luxury they might not have had were it not for raging sales. Walmart may well have rolled out a paid loyalty program anyway, and there seems little can be done to stop Amazon from its plans, but at the very least the supermarket should be a more formidable format going forward, especially if their momentum and share gains reinforce their strengths. For many COVID didn’t change strategy but accelerated it.
Other Guys Also Did Well But Could Do Better
Other formats saw results that were good but rarely supermarket good. Big guys such as Walmart and Costco saw their customary drawing power constrained by cuts in operating hours and store capacities, and their traditional reliance on selling things the COVID consumer didn’t necessarily need—travel services, auto repairs and apparel, among them—hurt their mix despite each moving tons of food volume. (Costco reports later this month.) BJ’s Wholesale, always the most supermarket-like of the clubs, experienced wild comp success—due in part to having more room to improve than a bursting-at-the seams Costco and underscoring benefits of a strengthening “loyalty by subscription” trend that today looks very much like a feature shared by the power players of the future.
Dollar stores and food discounters experienced some similar traffic and mix drawbacks of their mass counterparts but stood ready to welcome trade-downs if and when federal unemployment and stimulus benefits dry up and bear watching. These stores owe much of their momentum to becoming more supermarket-adjacent since the last recession, particularly Dollar General and Grocery Outlet. Improvements in store experience, assortment and omnichannel offerings—the latter only getting started—have the potential to impress new visitors to these formats.
The net sales figure above for Whole Foods—more accurately, Amazon’s “physical stores” unit—reflects rapidly declining traffic to stores but leaves out sales fulfilled by parent Amazon’s Prime personal shoppers and deliverers. The rapid sales growth of digital food in the quarter—well into the triple digits for most of the list—indicates that despite appearances Whole Foods is probably hanging in there.
Finally let’s note that these frothy figures are going to decline. The freshest of these results—from Kroger, through Aug. 15—indicate moderation in August accompanying a reawakening of restaurants and schools on a limited basis but remain in almost unthinkable double digits as the second half of what will be a historic fiscal year begins.