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The food industry has long been considered as a mature business with little in the way of top-line growth potential. That image may be changing. Real growth has steadily accelerated since the end of the 2001 recession to its fastest pace in more than 20 years. Behind the growth is an explosion in new product development and changing demographics that are favorable to the food industry.
The increase in product innovation has been driven by various factors. The globalization of consumer tastes has brought to America a wide array of new ethnic foods from Mexican to Thai. Even sushi can now be found in the seafood sections of many grocery stores. Growing consumer interest in health and nutrition has produced a wide range of nutrition-laced foods. Energy drinks have boosted the beverage category. Low-fat products have turned up in virtually every product category. Low-sodium products are likely to become more interesting to an aging population.

The Good News: Share of Wallet is Increasing
As consumers in the U.S. grew more affluent, their share of spending on food has generally declined until recently. Though periodic increases in the share of consumer spending on food have occurred in the past, all of the increases were either associated with a recession when spending on other categories dropped sharply or higher food inflation. The more recent increase differs as it is occurring during a period of strong overall growth in consumer spending and relatively low food price inflation.
In addition to the explosion in new products, the growth in food share reflects an expansion in food competition. Food offerings have become ubiquitous. Wherever you go, someone is trying to sell food to consumers. As a result, industry competition has never been greater.

Competitive Distress: Everyone is a Food Retailer
No longer is the major food retail chain the only competitor the specialty gourmet retailer faces. Wal-Mart and Aldi have both created new forms of competition that have taken a significant bite out of traditional grocery stores’ market share. The increased competition from these nontraditional sources has forced food retailers to pay more attention to price. In food retailing, the overemphasis on price at the expense of other value propositions, such as quality, selection, service, convenience, or customer experience, has done nothing to stem the loss of market share by traditional food retailers to other nontraditional competitors.
Drugstore chains are expanding their food offerings, as are convenience stores, plus food can be bought online, at discount stores, in quick service restaurants, and in warehouse clubs. Today, everyone is a food retailer. The expansion of competition has produced a food store market share graph that looks like an Olympic downhill ski run. Since 1992, traditional grocery stores have lost nearly 12 points of market share, roughly one point a year. At the current pace, the last grocery store will close its doors sometime in early 2050.

Implications for Food Retailers
When examining the sales performance of the top ten traditional grocery retailers, it would appear that as a group, they are losing market share. In 2003, the most recent year we have for individual company sales, the top ten traditional retailers managed to collectively post 2.7-percent sales growth at a time when the overall food business was growing at a 5.8-percent clip.
Consolidation by traditional grocery retailers also has not helped. Since 1996, selling, general, and administrative (SG&A) costs as a share of top-line revenues have risen from 22.5 percent to 25.1 percent, even as the number of public food retailers declined from 45 to 24.
Stopping the slide in market share has to be the industry’s top priority. The focuses on scale, improved efficiencies, and price have not been effective strategies in this regard. Much attention has gone into improving the store’s perimeter where a great deal of innovation and new product introduction has occurred. The center of the store continues to look much as it did a decade ago — accordingly, this would be a good place to start.

Implications for Convenience Stores
Traditional grocery stores can not allow this slide in market share to continue. They will be seeking ways to become more convenient or more focused in their merchandising. Convenience stores have done a good job in expanding their share of packaged food but have not been nearly as effective in their forays into prepared foods. While execution remains a challenge in this area, it is still an untapped opportunity for most convenience store operators.

Implications for Mass Merchants
Not all mass merchants have ventured into the food arena, nor would it be appropriate for all to do so. At the very least, those who have not should re-examine their reasoning and those who have should redouble their efforts. The biggest advantage that a compelling food offer brings is the increase in patronage that it creates by turning monthly shoppers into weekly shoppers. The combination of food and general merchandise will continue to work with time-pressed shoppers who are seeking ways to fill their shopping needs in a more time-efficient manner.