Food Retailing AG BM 102

Introduction Major interface with the customer – 2/3 of all food Place where customer shows preferences A sector in transition First stores to act as a group Consumer’s number one criteria for choice of supermarket is convenience

Percentage of disposable income spent on food 2010 food-at-home food away-from- home 5.5% 3.9 Source: USDA

Some PA Markets Philadelphia Pittsburgh Central PA - Harrisburg

Chains 11 or more stores working as a group Corporate chains – company owns everything Voluntary chains – independent wholesaler – Thriftway, Foodland, Shop N’ Save Cooperative chains – stores jointly own wholesaler – Shop N’Bag

Supercenters 20.7% of grocery sales in 2010 (est) 28% of sales in WalMart supercenters are groceries & tobacco in 2005

Convenience Stores 4.5% of business High gross margins Access obviously key – Uni Marts, Sheetz Cigarettes, lottery tickets, snack food, etc.

Sam’s Club & Costco 1,600 items rather than 25,000 for regular store Large sizes, one choice, high turnover Membership fees.

Vertical Integration The food chain controls an input supplier Private labels - 17% of food & beverage sales in 2009 Bakeries Dairies 24% of Kroger's total grocery sales come from its house brands; 41 company-owned manufacturing plants produce 7,500 Kroger products.

Buying Power Key to recent mergers Buy for whole country – over a long period Makes access difficult for small sellers Royal Ahold – Dutch Company – bought up lots of chains, including Giant – largest retailer on East Coast

Concentration Market share – how much of market do leading four firms have? Leading firm? Relevant market – On selling side small – distribution of major newspaper On buying side seems to be whole country

Supermarket Chains ChainShare 1993Share 2001 WalMart6%9.6% (19% now?) Kroeger0%7.3% Albertsons3%5.6% Safeway4%5.0% Ahold2%3.4% Sources different – numbers may not be strictly comparable

WalMart After the 2.3 weekly trips the average consumer makes to the food store – not profits from food Past decade- 29 chains have sought bankruptcy-court protection, Wal-Mart a catalyst in 25 of those cases Wal-Mart pays about 20% less in labor costs 19% of U.S. grocery sales Sell 32% of Disposable Diapers 44% of grocery sales in Arkansas in 2002 Walmart has 15% share in at least 75 markets

By Top 8 food chains will account for 65% of total U.S. retail food sales Cornell Horticultural Business Management and Marketing Program Sales of Top 8 Chains as a % of Total Grocery Sales

Supermarket market share Minneapolis-St. Paul 2009 Cub Foods 35.4* SuperTarget 13.9 Rainbow Foods 12.9 Wal-Mart Supercenter 9.5 Byerly's 3.7 Lunds 2.8 Trader Joe's 2.0 Festival Foods 1.9 Kowalski's Markets 1.9 Source: IRI InfoScan, published by Nielsen Co.'s Trade Dimensions

Supermarket market share Central Florida 2012 FirmShare Publix42.9% Walmart26.3% Winn-Dixie10.1% Sweetbay6.3% Super Target3.2% Save-A-Lot2.9% Source Tampa Bay Times, July 15, 2012

The number of fresh produce items carried by food retailers Source: Supermarket Business, Progressive Grocer

Economies of Scale In store- beyond 30,000 sq. ft. not much Advantage of large stores – non-food Disadvantages – search costs, supervision Warehousing & distribution – considerable economies within about 200 mi. circle – more stores better

Chain Economies Buying!!! Advertising Dis-economies - management

Pricing Mark-up pricing – e.g., cost times 1.33 Coupons Image competition

Margins ItemMarginItemMargin Canned goods 16%Frozen foods25% Dairy19%Housewares33% Meat20%Produce31% Non-foods>25%

Profit 1 to 2% of sales Depends on turnover of inventory If profit goes over 2% competition gets fierce Much (or most) of profit comes from promotional allowances from manufacturers Labor ~70% of a traditional grocer's overhead.

Industry Trends In-store banking In-store pharmacies More private labels More customer service Home delivery Home meal replacement

Concluding Comments An Industry in transition Mergers and increased concentration affecting access Competition on selling side local