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This chapter presents information on foodstore sales and sales growth; competition,
including the share of food sales by nontraditional retailers; trends and developments
in retail food markets; and recent ERS research related to public
policy.
Sales and Sales Growth
The Nation’s foodstores, including supermarkets, grocery stores,
convenience stores, and specialized foodstores, sold $484 billion of
retail food and nonfood products in 2005. Specialized foodstores, such
as meat and seafood markets, produce markets, retail bakeries, and candy
and nut stores, accounted for 4 percent of the total (see Glossary).
Recent year-to-year
inflation-adjusted sales growth has been moderate, as nontraditional
retailers have competed for a larger share of retail food sales, and
consumers have increased their share of food spending in restaurants
and other foodservice outlets (see
Glossary).
Competition
Many traditional supermarket firms are reviewing their pricing and product
mix strategies in response to the growth of nontraditional, price-oriented
retailers, including discount mass-merchandise stores, warehouse club
stores, and supercenters. Food products have become increasingly important
to the growth strategies of nontraditional retailers, as evidenced by
the rapid introduction of supercenters—a large combination supermarket
and discount general merchandise store, with grocery products accounting
for up to 40 percent of the selling area. Other retailers, such as drugstores,
dollar stores, and discount mass-merchandise stores, have increased food
offerings, including perishable foods, in recent years. Together, nonfoodstore
retailers accounted for 33 percent of total retail store food sales in
2005, the most recent year for which data are available, up from 16 percent
in 1990.
In addition, foodservice operators—including restaurants and fast
food outlets—have increased their share of total food spending
over the years. Long-term trends show that as household incomes have
increased, and more women have entered the workforce, the share of household
spending for prepared foods and meals has risen. By 2005, food-away-from-home
spending by households and businesses accounted for 49 percent of all
food spending, up from 45 percent in 1990 and 39 percent in 1980. See
ERS Food
Expenditure Data Series, table 12.
Trends and Developments
Economic and market forces appear to be driving major
trends and developments
in food retailing. In response to price competition from nontraditional
food retailers, supermarket operators have sought to increase consumer
satisfaction by introducing natural food products, developing and expanding
prepared and convenience food offerings, promoting upgraded store brands,
introducing self-checkout stations, expanding frequent shopper card programs,
and offering online home shopping services.
Food retailers are also
experimenting with new store designs. The Kroger Co. recently announced
the opening of a new "Marketplace" format store in Columbus,
OH, that is twice the size of its existing supermarkets. The new format
will include general merchandise, such as bath towels, bed linens,
office supplies, and patio furniture. Other supermarket operators are
introducing
ethnic-oriented formats; for example, Publix in Florida opened a new
Hispanic format called Publix Sabor. In addition to the ethnic foods
offered, the stores feature sit-down cafes, an expanded deli and hot
foods department, and personal care products targeted to the Hispanic
market.
 In
order to lower costs, foodstore retailers are striving to improve procurement
and operating efficiencies by introducing new information
technologies and supply-chain initiatives. Retailers are investing in
online exchanges—such as Transora, UCCnet, and Agentrics, the merger
of Globalnetxchange and Worldwide Retail Exchange—that allow business-to-business
transactions via the Internet. For many grocery retailers, use of the
Internet for transactions with suppliers and distributors promises greater
flexibility and lower transaction costs than the commonly used Electronic
Data Interchange (EDI) system. Because online exchanges allow suppliers
and buyers to interact at a lower cost relative to EDI, use of the new
technology has been extended to smaller and medium-sized firms. In addition
to firms adopting use of online exchanges, individual retailers, such
as Wal-Mart, operate private Internet-based networks to provide up-to-date
sales and inventory information to their suppliers to facilitate inventory
replenishment.
Many food retailers have expanded to gain procurement and operating
efficiencies. Counting on the economies of size gained through consolidation,
a number of retailers have pursued merger and acquisition strategies.
Mergers and acquisitions by large grocery retailers, including Kroger
Co., Albertson’s, Ahold USA, and Safeway, have produced a significant
increase in the share of total U.S. grocery store sales by the largest
4, 8, and 20 firms. Between 1997 and 2000, more than 4,100 U.S. supermarkets
were acquired, representing $69 billion in sales. By 2005, the 20 largest
retailers accounted for 62 percent of total grocery store sales, up from
39 percent in 1992. More recently, third-ranked Albertson’s was
acquired in 2006 by a consortium of investors, including grocery wholesaler
Supervalu and drugstore operator CVS.
Public Policy Issues and Research
The changing structure of U.S. retail food markets and its
impact on agricultural suppliers, financial performance,
competition and food market prices, and purchase patterns
of low-income households are important areas of research
that are relevant to policymakers.
ERS has examined the effect
of the changing structure of retail food markets on the dynamics
of produce markets, including market channels, trade practices,
and retail pricing behavior. In a series of five reports,
ERS examines evolving produce markets and market channels,
emerging trade practices, trends, issues regarding transactions
between buyers and sellers, and retailer market power for
selected produce commodities (see Recommended
Readings).
Recent research examined the financial performance
of food retailers during a period of heightened
merger and acquisition activity. A study of large food
retailers’ financial
performance between 1993 and 2002 found that return on investment
was relatively flat—averaging 12 percent annually during
a period when the 20 largest firms’ share of grocery
store sales increased from 40 percent to 56 percent. Increasing
food sales by nongrocery store retailers, new information
technologies, and more efficient supply chains have likely
contributed to price competition in retail food markets,
despite the rising share of retail grocery sales by the 20
largest firms (see Bjornson and Kaufman, "Change and
Firm Valuation in U.S. Food Retailing and Manufacturing," Journal
of Food Distribution Research, Issue 35, No. 2, July
2004).
Other ERS research has examined the impact of retail
food markets on consumers and low-income households in particular.
In CPI Bias from Supercenters: Does the BLS Know that Wal-Mart Exists? ERS researchers examined the expanding role of
supercenters and other nonfoodstore retailers on food markets.
They found prices for 20 food categories to be 20 percent
lower, on average, in nontraditional stores than in supermarkets.
The researchers observed that supermarket prices also decreased
with the increased presence of nontraditional retailers—about
4 percent over a 48-month period—resulting in lower
average food prices paid by consumers within a market such
as a metropolitan area.
 A study of household food spending examined low-income and
higher income economizing practices to understand differences
in purchasing behavior. The results indicate poor households
make tradeoffs in the foods they purchase to meet spending
constraints. Lower income households accomplish this by purchasing
more food on sale, buying a greater share of store-brand
products, and selecting less expensive meat, poultry, and
fresh fruits and vegetables (see Exploring
Food Purchase Behavior of Low-Income Households: How Do They
Economize? ).
ERS also investigated whether operating costs of supermarkets
differ according to their share of food stamp participant
redemptions and whether metropolitan or nonmetropolitan area
locations contributed to differences in food prices among
stores. The study analyzed operating costs and other characteristics
of a panel of 886 randomly selected supermarkets. In urban
locations, stores with high food stamp redemption rates lag
other stores in the adoption of progressive supply
chain and human resource practices, but this pattern does
not hold in nonurban locations. In addition, stores with
the highest food stamp redemption rates have high costs of
goods sold relative to other stores,
but stores serving the poor also have significantly lower
payroll costs as a percentage of sales. Overall, the results
did not provide strong evidence that it costs more to operate
supermarkets serving low-income consumers (see Supermarket
Characteristics and Operating Costs in Low-Income Areas).
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