Dive Brief:

• Moody’s Investors Service said this week it expects supermarket operating profits to grow 8% this year as deflation eases, according to Supermarket News. In contrast, last year saw operating profits decline 5%.
• Growth will come mainly in the second half of this year, and will be driven by promising trends in private label products and natural and organic food.
• Moody’s noted that brick-and-mortar stores are still driving growth in food retail, with online sales accounting for just 1% of the market. The agency expects e-commerce sales to account for no more than 3% of the market within the next five years.

Dive Insight:

This comes as a bit of good news for supermarkets, which have endured a prolonged deflationary period driven by a perfect storm of factors: bird flu, cheap oil prices, and a particularly strong U.S. dollar.

Moody’s noted a few industry trends that should help retailers grow rather than just tread water. These include the uptick in sales of natural and organic food and beverage, which grew 7% annually between 2012 and last year and is projected to increase 70% over the next four years. It also includes private label products, which have seen increases in assortment and sophistication at retailers including Whole Foods, Kroger and Southeastern Grocers.  

Prepared foods and food service are other segments that can propel retailers in a post-deflationary environment. With high margins and the ability to drive store traffic, upgraded meal options are becoming a must-have for supermarkets across the country. As retailers expand their hot bars, salad bars and grab-and-go selections, however, they’re finding they must keep pace with c-stores, restaurants and meal kit services, which have ramped up their offerings in recent years.

“It’s not about Kroger or H-E-B or Meijer losing to Wal-Mart or Dollar General or Aldi,” Diana Sheehan, director of retail insights with Kantar Retail, recently told Food Dive. “It’s about Kroger losing to Blue Apron or H-E-B losing to Whataburger.”