Regional grocers expected to struggle amidst e-commerce and Amazon influence; others fighting back – Middle Market Memo

23 October 2017

Recent struggles in the regional grocer market aren’t expected to abate any time soon, as Amazon’s recent buyout of Whole Foods, the continued rise in e-commerce and non-traditional venues carrying groceries, such as Walgreens, are expected to continue to eat into their market share.

 

In past 15 months, this has resulted in the bankruptcies of Fairway MarketsCentral Grocers, and Marsh Supermarkets and the receivership of Gordy’s Markets. Other regional grocers such as Bi-LoShaw’s Market, a unit of Albertson’sGristedes and Fairway are also expected to struggle, said multiple industry bankers and consultants.

 

In response to these negative headwinds, Fairway has ignited its e-commerce business even if it initially costs them margin, said Dorothy Carlow, chief merchandising officer of Fairway, in an interview with this news service. “It is the new standard in food retail and we have to deliver that experience,” said Carlow adding that “sales growth has been faster than we thought.”

 

Carlow said that, on average, e-commerce is 10% lower on margin then new-store sales for the New York-based grocer due to costs associated with logistics. The company emerged from bankruptcy in July 2016 in a deal that saw GSO Capital and other pre-petition lenders swap into equity and USD 84m of exit debt.

 

Even in a highly deleveraged environment, industry analysts think Fairway and others will continue to struggle absent a sizeable parent company such as what Shaw’s has with Albertson’s.

 

“I think it’s going to be tough for regional grocers to have a competitive place in the future unless they have backing of a larger parent and hence the scale to get good pricing,” said Keith Daniels, partner at Carl Marks Advisors. “Some of the better ones will be bought out, but the smaller ones not doing well will have to close or restructure.”

 

The migration away from regional grocers has transpired over the past few years. Last year these grocers, which include shops with more than USD 2m in revenue, were responsible for 44% of grocery sales based on dollar share compared to 50% a decade ago and 90% in 1988, according to the 2017 Future of Retail report by Inmar Willard Bishop Analytics.

 

The report also shows that supermarkets were the only category in traditional grocers that declined in number of stores, dollar share as well as annual sales last year compared to 2015.

 

As consumers shift to low cost as well as convenient foods, regional grocers are struggling to keep up with the changes. National chains like Wal-Mart and Kroger can leverage their scale to charge low prices in the face of pressure put on by discount supermarket chains like Lidl and Aldi.

 

However, regional grocery chains often neither have the scale to compete at lower prices nor do they have the capital to invest in their stores and in popular trends like direct delivery, according to the sources.

 

Additionally, Amazon’s buyout of Whole Foods has pushed e-commerce higher on grocers' priority lists, and while it may not have an immediate effect, it is indicative of a macro change in the industry that will affect stores from local to national.

 

“It doesn’t matter where you are located, if a UPS delivery truck goes to your residence, it doesn’t matter where you are,” said David W Schoeder, principal at The Food Partners.

 

While e-commerce in still a small category in food and beverage sales, with around 4% of total sales last year, the number “will increase exponentially as more retailers accelerate their digital strategies and expand their omni-channel capabilities,” according to the Inmar Willard report.

 

The report expects traditional supermarkets by 2021 will have a store decline of 24.6%, down to to 19,132 from current 25,380 stores.

 

 

In order to stay relevant, regional grocers will have to be attuned to their customers’ preferences, said Schoeder. “Retail grocery store chains that were operating as conventional stores are finding that customers are leaving them. You have to have a twist nowadays.” he added.

 

Distributors to these struggling stores are also exposed to industry changes and, as middle men, have less control over their situation. Current conditions create good opportunities for larger grocery chains to snap up regional ones and industry experts expect to see continued M&A activity in the future.

 

“We are just at tip of the iceberg. It’s a very exciting time in food retail,” said Mark Belford, co-head of consumer & retail at KPMG Corporate Finance LLC. “Smaller guys will ask "what next?" and business owners with no vision or capital to invest will be bought out or go out of business. What is old is new again in retail.”