The daily question we all face; “What do you want to do for dinner?”, was once black and white, with “cooking” representing a trip to the grocery store and “eating out” representing a trip to a restaurant. That daily decision is no longer black and white, as restaurant quality meals become a larger, more profitable, and growing segment for grocery stores, convenience stores, and meal kit providers.
From the moment that Julia Child entered our living rooms over 50 years ago, bringing refined French cuisine to the masses, the American palate changed forever. Today, celebrity chefs receive unprecedented exposure on all forms of media (television, web, social etc.), and names like Bobby Flay, Giada De Laurentiis, and Guy Fieri are now as recognizable as superstar athletes and rock stars!
We now have an entire consumer segment of “Foodies” that eat out more often, enjoy trying global fare, and are much more educated about the food that they eat. They want natural, organic, locally sourced, clean labels whether they are enjoying a meal at their favorite restaurant or shopping their neighborhood grocery store. In 2016, for the first time in history, retail sales at US eating establishments surpassed those of grocery stores. And there has been a steady supply of new restaurants to meet this demand. In 2001 there were 469,018 restaurants in the country. By 2016, that number had jumped to just over 600,000, an increase of 30%!
But if you start to dig a little deeper into the restaurant growth story, there are some troubling signs and legitimate concerns about overcapacity — or dare we say a “bubble.” According to NPD, in 2016 the number of independent restaurants in the US dropped by 3%, and the overall number of restaurants (independent and chain) fell by 1%. While certain segments of food service are maintaining moderate sales growth, NPD data shows that the casual dining and midscale/family dining segment continue to be soft. Visits to casual dining restaurants are falling by 4 percent, and midscale/family dining lost 3 percent of their trips during the first quarter of 2017. In addition, consumers are defining “dining out” much differently than they have in the past. Traditional restaurants are losing share to Food Retailers (Wegmans, Whole Foods, HEB etc), Convenience stores (WaWa, Sheetz etc.) and Meal Kits (Blue Apron, Hello Fresh, Plated etc.) Many Food retailers are now offering restaurant quality meals at a value price point that can be consumed on sight or brought home. The fastest growing segment of Food Retail happens to be Food Service offerings created and sold inside the grocery store. Convenience stores are also beginning to steal restaurant trips with their Food Service offerings. If you have been inside a WaWa lately, you have probably noticed that it is certainly not your father’s gas station! We are more fascinated with food than ever, and admittedly the majority of us don’t know how to cook. Household celebrity chefs now have other ways to get their gourmet fix, without actually going a restaurant or a grocery store. There are a growing number of online providers like Blue Apron, Hello Fresh, and Plated, that deliver restaurant-quality meals with the prep work already done, and easy to follow instructions so that even those of us that struggle to boil water, can create terrific gourmet meals in our own kitchens.
As we look ahead to the next decade, Technology will challenge the status quo at traditional grocery chains and restaurants. Today’s consumer has a much different expectation today than we did just 10 years ago (thank you iPhone, Amazon, and Google!). We expect to engage with brands on our terms, the way we choose to, not the way the brand “markets” us to. We expect things now, and customized to our liking. Amazon can get you want you want, in some cases, within the hour, and Google can provide any answer in less than a minute, and in many cases, seconds! Now that Amazon has entered the Food Industry directly with their acquisition of Whole Foods, we could see the greatest disruption the food industry has seen in over 50 years.
The lines between Food Service and Food Retail are already blurred and will only become even more gray over time. The daily question we all face; “What do you want to do for dinner?”, was once black and white, with “cooking” representing a trip to the grocery store and “eating out” representing a trip to a restaurant. That daily decision is no longer black and white, as restaurant quality meals become a larger, more profitable, and growing segment for grocery stores, convenience stores, and meal kit providers. Leading the way is Wegmans, who has unseated both Publix and Trader Joe’s as America’s favorite grocery chain. The research firm CRC projects that five years from now prepared foods will represent 6.7% of grocery store sales, up from just 1.7% five years ago. CRC predicts that prepared food sales could exceed $65 billion in annual sales five years from now. Today, “going out” to eat no longer exclusively means a trip to your local restaurant, but is becoming more likely to be a Wegmans, Whole Foods, HEB, or any number of other traditional grocery retailers that continue to improve their prepared offerings each and every day. Every dollar spent on prepared meals, and every trip made to “dine out” in traditional grocery outlets, represents a lost opportunity for the food service channel. Food retailers have been successful at growing food service because they meet all the essential elements that drive consumer behavior, which according to NPD’s Warren Solochek, include “convenience, quality food, value, and a positive experience.”
Lessons from Walmart
When Walmart entered the grocery business, there was a good bit of skepticism, with established grocery chains scoffing at the notion that a big box, non-food retailer could possibly be successful selling food. “They don’t know our business,” and “Food is much more difficult than TV sets” was the traditional Food Retail perspective at the time. By the late 1980’s, Walmart proved to be a fast learner, launching their first Supercenter in 1987. They are now the largest “grocery store” in the country, with over 21 percent market share of the U.S. traditional grocery industry. Wal Mart’s mastery of supply chain and logistics, honed over previous decades, enabled them to execute their mission of “Save Money, Live Better” and changed how consumers bought their groceries. They became, in essence, a supply chain and logistics company with stores that sold food. Their inventory management and cost controls continue to be the envy of industry, and create a significant competitive advantage. They have forever changed how products are sourced, transported, and priced on the shelf. Wal Mart’s size and scale coupled with their unmatched supply chain and logistics expertise, has put enormous pressure on their traditional food retail competitors, and in many ways changed how consumers shop for food.
The Future with Amazon
Perhaps the most disruptive force in the industry today is Amazon. Arguably, Amazon has the most robust household information of any retailer in the world (brick and mortar or online). Consumers today require customization and want personalization, and Amazon is poised to deliver both in a way that other retailers can’t and won’t be able to for some time. Couple their knowledge of the consumer with a supply chain and logistics expertise that rivals Wal Mart’s, and it is not a stretch to suggest that Amazon is a formidable threat. Much of what we heard in the 80’s when Wal Mart entered the Food business, we are hearing again in reference to Amazon’s desire to win in Food. Assuming that the acquisition of Whole Foods gets completed, Bezos has already done what most naysayers claimed he couldn’t do — quickly scale a physical food presence across the United States. With over 450 stores (mini distribution centers) located in sought after locations (affluent neighborhoods), he’s done just that. So, what does this mean for the industry, and what players will be impacted the most? Food retail? Food Service? The short answer is all of the above. Amazon’s move into this space is an absolute game-changer, and the impact will be felt across the food landscape for years to come (restaurants and grocery stores). Amazon will unleash their superior household level insight along with their supply chain and logistics expertise to once again change how the consumer shops and interacts with food, much like Wal Mart did in the 80’s and 90’s. In addition to their operational advantages, Amazon doesn’t have to play by the same rules on Wall Street as their traditional competitors do. This may change over time as Amazon continues to grow, but today their profit expectations are very different from other food industry companies trying to compete, freeing them up to take risks that others can’t.
Amazon is betting that they can innovate faster and execute better than the incumbents, by using their technology, knowledge of the consumer, supply chain and logistics advantage, to change how both consumers and culinarians, purchase and interact with food. They have redefined choice and convenience for consumers in the online world, and who’s to say they can’t do the same in food service or food retail? Amazon has already built out local distribution centers that enable same day delivery of merchandise. How soon will they scale up food delivery to the home? When do they start supplying directly to restaurants? Price transparency, convenience, and choice are not easy things to get in the food service world today, but are becoming an expectation of consumers everywhere. These same consumers are chefs and restaurant owners, that will welcome the transparency and ease of doing business that Amazon currently provides. In addition, most of these culinarians are probably already Prime or Amazon business customers (over 50% of US households are Prime members). Can they deliver the impossible: size, scale, highly differentiated offerings that are personalized? I would not bet against them!
In the face of this relatively new and formidable threat, coupled with a more educated and demanding consumer, food retailers, restaurants and the entire ecosystems that supports and supplies them, must reevaluate everything that they do. It has always been important to start with the consumer, but in today’s environment, the consumer has more control than ever before, and the failure to keep up with them will be devastating. If you are a food company that does not have the consumer front and center (in how you operate every single day, not just in a company slogan or mission statement), you will struggle to compete and survive in this new world. Amazon operates each day with a “Day 1” mindset. This approach to the business enables them to move quickly and provide consumers with things they didn’t even realize they wanted. There is a rather large segment of the Food Industry just now building on line ordering capability and an omni-channel strategy, Amazon is already there and is close to taking “ordering” completely out of the equation with automated replenishment. Satisfying a very different consumer and competing in this new digital world will require new thinking and bold leadership. Ask yourself, is whatever product or service you provide fast, convenient, transparent, and easy? If not, that is a gap that Amazon will exploit. Ask yourself, are your consumer performance standards high enough, and are you delivering on those standards at a rate that will enable you to compete in the future. If not, you need to challenge your existing metrics as they pertain to the consumer / customer. Being “good” is simply not enough when the expectation is great! The most important first step is the realization that the competitive landscape has shifted dramatically and only those able to adapt and change will survive. There is some time to react, but the clock is definitely ticking!
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