Have grocery stores reached the saturation point?

Dive Brief:

Grocery is a zero-sum game with a finite number of consumers and only so much food spending for stores to capture, but food is sold in more places than ever today. This massive retail build-out is taking a toll on earnings and leaving the grocery industry vulnerable to store closures, according to The Wall Street Journal.
Square feet of food retail space reached a record 4.15 per capita last year, according to commercial real estate firm CoStar Group. This is not only the highest food space per capita ever recorded but also nearly 30 times the grocery space allocation that existed in 1950, reports The Wall Street Journal.
Consumers are shifting away from big weekly stock-ups in favor of smaller fill-ins and immediate consumption trips, making store oversaturation all the more painful for retailers. The gradual movement of grocery shopping online is also contributing to low store traffic.

Dive Insight:

A structural shift is underway in the grocery industry. The rapid buildup of supercenters and big food/drug combination stores that characterized grocery retailing for decades is slowing, if not coming to a screeching halt. Meanwhile, small-box, limited assortment stores like Aldi have been on an explosive growth course. The reality is that the industry may be overstored, especially considering that Amazon and other online grocery options are projected to grab a bigger share of grocery spending in the years to come. Grocery could be facing some store closures and the need to reinvent in-store space to better accommodate how today’s consumers shop.

The large-format grocery segment — which includes supercenters and big food/drug combos — may be approaching the saturation point. Too many stores mean too few shoppers to go around for all of them to be successful. Spreading shoppers and their grocery dollars around to more and more stores limits any real growth and ultimately hurts performance. This is reflected by the growing number of grocers reporting stagnant — or worse yet, declining — same-store sales. The Wall Street Journal points to data from FactSet that shows same-store sales for food retailers flattened in 2016 following growth of at least 3% annually since 2013. The metric is projected to remain static this year, too, as competition for food dollars intensifies.

Both Walmart and Kroger have slowed down their new store plans, and instead have turned their focus to improving existing store sales by capturing an increasing share of stomach, and investing more in online/digital and click-and-collect pickup models. Walmart is opening just 55 stores this year, down from 132 it opened last year. It is increasingly focusing on building online capabilities. Kroger has slashed its new store development plans by 35%, with 55 new stores expected to open this year versus 85 in 2016. Meanwhile, it’s quickly scaling up its ClickList order online and pickup at the store service.

Competition from small-box, no-frills grocery formats — including fast-growing Aldi and sibling Trader Joe’s, and U.S. newcomer Lidl — still have plenty of expansion runway ahead and threaten to grab a bigger piece of the grocery pie. Aldi, which operates about 1,600 stores, plans to spend $3.4 billion to expand to 2,500 stores across the U.S. by 2022. It also plans to establish a beachhead in Arizona to support West Coast expansion. Lidl, which opened its first U.S. stores in June, plans to open 100 locations along the East Coast in the next year and more than 600 stores over the next several years. Although its success isn’t a foregone conclusion, chances are good that more stores will be forthcoming.

Brick-and mortar grocery may look markedly different years from now, with fewer, bigger stores and more conveniently located small-box locations. Existing large store formats will also be shuffling the decks to reinvent themselves in an effort to grab a bigger share of stomach and reinvigorate their growth prospects. Despite these efforts, store closures and the possibility of sector consolidation could be looming on the horizon. As consumer demand and growth in grocery spending fails to keep pace with the record-level of retail food space per capita in existence, it will be interesting to see how the industry adapts.