Grocers Could Face Tough Years Ahead

As people avoided in-restaurant dining during COVID-19 and stayed at home, grocery stores have been the beneficiaries. 

Once things return to normal, this momentum could be lost unless they retool for the strategic challenges ahead, according to a report from Bain & Co. In fact, the sector could be facing several challenges in the year.

“The dilutive shift to online grocery has accelerated, and omnichannel leaders are locking in shoppers to subscription services,” according to the Bain report. “Discounters continue to build stores, lowering prices and squeezing margins. Consumers still want more convenience, more value, more environmental and social impact. Restaurants—such an easy alternative to eating in before Covid-19—will regain traction at some point.”

Bain projects that online grocery penetration in the US could rise from 5.1% at the end of 2019 to 11% in 2025 and 15% in a 2030 base case.

Without concerted strategic action, Bain modeling suggests grocery profits will only increase  1.2%—from just over $34 billion to $39 billion–between 2019 and 2030, in the absence of concerted strategic action.

The problems could start next year. If there is a vaccine, Bain thinks diners could rush back to restaurants and annual revenues could fall by 4% to 7%. If the pandemic lingers and restaurants struggle, US grocery revenues could rise 2% to 5% in 2021. In Bain’s base-case scenario for 2021, restaurants begin to recover and grocery sector revenues stay flat or decline slightly. In comparison, grocers posted 2.6% annual sales growth between 2014 and 2019.

Bain thinks grocers could mount a “value-led counterattack” by doing things like stressing the cost of their ready-to-eat rotisserie chicken and roasted potatoes versus going out to eat or ordering in.

Despite their success during the pandemic, some landlords avoid grocery-anchored retail.

Brian Capstick, EVP of Operations for Baceline Investments, which has 75% of its portfolio in non-anchored shopping centers across America’s heartland, has seen non-anchored shopping centers perform better, given the price, in his portfolio. 

Baceline runs 80 of these shopping centers with 850 tenants, including national chains and mom-and-pop stores, such as beauty salons, pet stores, optometrists, liquor stores, restaurants and wireless stores.

Capstick says there is a high risk if the grocery store leaves. “No one likes going to the shopping center with the empty grocery store,” Capstick says. “No one wants to be in a tenant lineup with a big empty grocery store. Then all your tenants leave after the grocery store closes. So that’s one of the reasons why I like the unanchored centers.”