ARLINGTON, Va. — Confronted with a tumultuous business environment, food retailers and their suppliers are investing in more proactive and innovative approaches to shield their businesses from the vagaries of the future. That is one of the major conclusions offered by The Food Retailing Industry Speaks 2023, the annual analysis published by FMI – The Food Industry Association.
According to the 74th annual iteration (2024 will mark FMI’s 75th anniversary) of the food retail industry annual report, retailers and suppliers are prioritizing innovation to boost operational efficiency and even create redundancies across product supply and assortments. They are also investing in technologies for worker recruiting, training and retention as well as in pay increases to reduce labor issues. Finally, they are prioritizing competitive pricing and strategies to provide value and maintain customer loyalty.
“Food industry companies are maximizing efficiencies and, in some instances, creating strategic redundancies in the supply chain in their unending effort to ensure consumers have access to the products they love,” says Leslie Sarasin, president and chief executive officer of FMI. “The industry is also heavily invested in bringing more creative approaches to product assortments that will continue to delight and inspire their customers.”
Not surprisingly, food retailers are increasingly focusing on their perimeter departments to bolster their competitive power and attract customers. For example, in 2022 the percentage of retailers using fresh prepared or foodservice programs increased to 85% from 75% the year before, while produce programs grew to 74% from 70%. However, success is not a slam dunk; only 55% of those who leveraged fresh prepared/foodservice programs reported success, while 63% of those employing produce programs considered them successful. Nonetheless, 74% of food retailers plan to expand the space allocated to fresh grab-and-go selections, while 40% are looking to increase the size of their produce departments.
Service meat departments with the ability to provide custom cuts, on the other hand, were a solid winner for those who deployed them (68% used them; 68% reported success). Seafood departments also did well, as 58% of retailers offered them and 50% reported success.
Interestingly, fresh departments contributed 41% of total sales last year, led by meat (12%), produce (11%), dairy (6%) and deli (5%). In-store bakeries and seafood departments accounted for 2% of sales each. Besides fresh foods, dry grocery was the sales leader with 40%, while frozen foods contributed 8% and pharmacy generated 7%, followed by health and beauty at 3%.
Shifting focus to the industry P&L, sales for food retailers rose a robust 4.9% in 2022, coming on top of strong gains in 2020 (15.8%) and 2021 (5.2%). Last year’s growth was largely driven by inflation, however, rather than unit volume growth. Same-store sales grew at 99% of stores, down slightly from 100% in 2021. The average transaction was $44.02, up 3% year over year, likely a result of inflation.
The bottom line remained healthy as well, as net income came in at 2.3% of sales, down from last year (2.9%) and 2020 (3%), but still well above 2019 (1%). Gross margins remained strong (31.2/%).
Looking ahead, about 41% of food retailers expect same-store sales to increase this year, but only 12% expect net income to improve, as most anticipate higher operating costs. Interestingly, 42% of suppliers expect their bottom line to grow this year.
Concern about supply chain disruptions appears to be lessening. Less than half (44%) of food retailers and suppliers (32%) expect such disruptions to negatively impact their businesses this year.
“The positive news is the industry is signaling its expectation that supply chain disruptions will lessen as we move through 2023,” Sarasin says. “Across the food supply chain, we are taking the lessons learned over the past few years to change the way we invest in our employees, innovate to future-proof our businesses and, most importantly, adapt our operations to better engage with and serve shoppers.”
With inflation still very much a factor, retailers are fine-tuning pricing and also increasing consumer communications about value across a variety of marketing channels. Nearly 70% are showcasing their private label offerings as high-quality value alternatives, and more than 80% plan to increase their investment in private brands over the next two years.
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