Los Angeles-based firm CBRE delivered projections on topics from e-commerce to prepared meals to store experience in its latest research report on the grocery industry.
The company divided its report into 11 predictions and included real estate implications for each.
1. Steady growth ahead
Total grocery sales grew 3.5% in 2018 to more than $743 billion, and CBRE expects reliable growth to continue for the next five years.
“Because of the price elasticity of food relative to most other retail segments — even when consumers spend less, they still must eat — grocery is among the most stable retail categories,” CBRE wrote in its report.
For the same reason, the industry should fare better than others if an economic downtown forecast for late 2020 comes to pass.
Lower e-commerce penetration is another stabilizing factor for grocery, “(limiting) the profit margin disruption seen in many soft goods segments,” CBRE wrote.
2. Nontraditional formats rising
Conventional grocery stores have about 58% market share, compared to 71% two decades ago, and supercenters and club stores have been the main formats gaining ground. Competitive prices and private label strategies are key factors; by 2022, 25% of club sales will be private label, per CBRE.
Discounters like Aldi and Lidl and smaller-format specialty retailers like Trader Joe’s have also chipped away at the market share of traditional grocers, and many of those companies continue to grow their store counts.
3. More investments in stores
Price pressure from discounters and pressure to offer pickup and delivery are expected to motivate companies to remodel stores and open new stores when it makes sense to do so.
“Despite profit-margin pressures, increased competition is driving many large grocers to reinvest in existing store portfolios and seek opportunities for strategic expansion in regions or consumer segments with good growth prospects,” CBRE wrote in its report.
It cited spending commitments by Aldi — which plans to lay out billions for remodels and new stores — and Ahold Delhaize, which is making updates to Stop & Shop and Food Lion stores.
In addition, companies are experimenting with smaller formats, like Publix with Greenwise, Hy-Vee with HealthMarket and Fast & Fresh, and Giant Food Stores with Giant Heirloom Market.
4. Consolidation continues
CBRE’s report includes a chart that shows the banners Kroger, Ahold Delhaize and Albertsons have acquired in recent years; since 1999 they have purchased more than 35 grocers.
The firm expects acquisition activity to continue as e-commerce grows and store footprint becomes more critical.
“Those with the margins to invest and the physical scale to efficiently reach millions of households have a distinct advantage,” CBRE wrote. “As such, expect larger grocers to continue acquiring smaller and regional chains.”
5. E-commerce set for further growth
CBRE projects that online grocery share will reach 5-10% by 2022.
The pace of growth depends on consumer demand and the ability of supermarkets to foot the cost of offering pickup and delivery, according to the firm. It notes that online grocery share is higher in the United Kingdom because it has a smaller area to cover and that share is also higher in China because of lower labor costs.
Still, significant growth of e-commerce is expected.
“The store will remain critical to grocery revenue and profit, but expect significant changes in layout, design and product and service offerings as grocers adopt more and more omnichannel strategies,” CBRE wrote.
6. Location matters for e-commerce
The cost of delivery means the service is more economically feasible in some areas than others.
“E-commerce likely will grow faster in denser urban markets where distribution to a wide customer base can be more efficiently managed,” CBRE wrote. “In lower-density suburban and rural locations, expect more in-store shopping and click-and-collect models, as distribution costs are higher for lower-density populations.”
7. Convenience focus means threats, opportunities
Convenience stores brought in $242.2 billion in 2018, up 2.2%.
The ability to meet shopper needs more quickly has prompted some grocers to invest in smaller formats, as mentioned earlier. That tactic is especially likely in urban settings,”where competition is high and consumer expectations for speed are even higher,” CBRE wrote.
8. Prepared meals gain prominence
Meal kits have seen growth, but the companies offering them via delivery have struggled to make money. However, the demand is clearly there for fast but quality food.
Instead of meal kits, grocers could — and some have already — go another direction.
“An evolution toward prepared meal kits (where the customer simply reheats the meal) could be more profitable since it meets rising consumer demand for convenience, stems F&B share loss to restaurants and provides higher margins,” CBRE wrote.
9. Checkout lines disappear
Investing in technology in grocery retail lowers operational costs, streamlines logistics and provides more convenience for shoppers.
From spill-detecting robots, to automated fulfillment centers for online orders, to self-checkout enabled by smartphone apps, grocers are already rolling out advancements that free up their employees to interact with shoppers rather than perform mundane tasks.
“Advancements in cashier-free shopping technology like sensors, smart scans and automated payments will make standing in checkout lines a thing of the past, driving customer convenience and opening store space for more revenue-generating uses,” CBRE wrote.
10. Value of in-store experience to grow even more
Consumer packaged goods companies in particular can use e-commerce to go straight to shoppers and offer lower prices, but in-store experience and services will help the store remain relevant, CBRE projects.
“While direct-to-consumer models present a marginal threat over the next five years, grocer should prepare now for longer-term disruption,” the firm wrote.
11. Stores go beyond groceries
Because the industry is known for its low margins and competition is only increasing, more and more grocers are looking for alternative revenue streams.
Hy-Vee has partnered with Orangetheory Fitness and Wahlburgers, Target with FedEx, Kroger with Pinterest and NASCAR and Rapid Fired Pizza, and Walmart with Buzzfeed.
“Average margins on grocery items are between 1% and 3%,” CBRE wrote. “As their partnerships with non-grocery companies increase, grocers will gain a stream of income from higher-margin categories while driving customer traffic to the store. Higher margins will ultimately give grocers more capital to invest in technology and their store strategies.”
You can download the full report on CBRE's website.