Pandemic Accelerates Retail Trends In Supermarket Channel

COVID-19 has brought the supermarket channel to a crossroads, as a tried-and-true format that has been challenged to fundamentally adapt to a disrupted marketplace that could provide the sector some advantage but could severely penalize those that refuse to adjust to an altered reality.

The acceleration of retail trends has been a theme throughout the coronavirus pandemic in the U.S. Yet it may, at least potentially, push supermarkets further faster than any other segment in retailing. Overall, supermarkets haven’t been on the forefront of retail innovation, although many have taken steps to embrace new ideas and fresh approaches.

Among the majors that have made a commitment to significantly reshaping operations, Kroger may be one supermarket operator able to build on the disrupted marketplace, given its embrace of retail technology that helps it more precisely meet shopper needs and preferences, and compete with cross-channel rivals including mass marketers and warehouse clubs, and even restaurants.

Yet innovation doesn’t necessarily mean the kind of tech-driven changes Kroger has made. By introducing new, easy-to-shop formats at a time when consumers are stressed by financial and health safety concerns, deep discount grocers are in a position to take market share from traditional supermarkets. It’s noteworthy, however, that some supermarket operators have thrived based simply on operational excellence with Wegmans, H-E-B, Publix and Hy-Vee among the standouts.

The supermarket channel’s position in the retail marketplace has eroded over the past few decades. When supercenters, warehouse clubs and deep-discount grocers began to proliferate 40 years ago, the overwhelming proportion of supermarket primary grocery shopping trips began to slip. By 2005, according to the Food Marketing Institute, they had fallen to under 70% before stabilizing at about half by 2019. And then came COVID-19.

Suddenly, the relationship between supermarkets and their customers became, at the same time, more tenuous and vital. Social distancing requirements meant consumers could only shop stores deemed vital and necessary to keep open. Still, supermarkets faced competition from other channels that had developed in-store and curbside pickup as well as delivery options they had not explored. But many supermarkets did something they aren’t normally known for doing: They acted fast. They developed curbside pickup and delivery programs, usually tapping third party delivery services that had been growing, including Instacart and Target-owned Shipt, to get to customer households.

Neil Stern, a senior partner at consultancy McMillan Doolittle, said the changes wrought by the coronavirus pandemic are fundamental and that supermarkets have derived some benefit that they can leverage by assessing and playing to shifts in customer behavior.

“It has been a massive challenge for supermarkets to operate in this environment, from keeping staff and customers safe to dealing with an incredibly volatile supply chain. In general, they have been net gainers but there have been product and mix shifts— prepared foods/bakery down, packaged foods up— that have longer term implications,” he said.

Supermarkets gained as other channels that competed with them in at least some categories closed down.

“Here is something really tangible and powerful that comes with being an essential provider of goods for a community,” Stern said. “While this has always been the case, it becomes visceral during the pandemic. My sense is that they will hold onto to some of that even when conditions normalize.”

Ethan Chernofsky, vp/marketing at traffic tracker Placer.ai, said store visit data indicated that the trend in the pandemic was one toward fewer store visits of longer duration that favored retailers, including supermarkets, that could satisfy a wide range of consumers needs during a single shopping trip. A consequence of that, he said, was supermarket visitors taking in the whole store rather than keeping their noses buried in a shopping list. They were more likely to appreciate and consider the whole range of products supermarkets stock including products for the home, both everyday and seasonal.

As the coronavirus crisis plays out, supermarkets and, really, any retailers that don’t learn from their experience in the pandemic, are likely to suffer as consumer perceptions and behaviors change.

“Unquestionably, retailers who had built stronger online capabilities pre-pandemic were bigger beneficiaries during this time,” Stern said. “Walmart, Amazon and Instacart are net winners. E-commerce in food was fairly small, let’s say 3% to 4%, pre-pandemic and is over 10% today. A significant amount of that business will remain. Most retailers were ill-equipped to handle the extra demand and all will have to quickly build better capabilities, whether through third party partners, dark stores or dedicated fulfillment centers.”

Technology, though, isn’t the only way for supermarkets to become more competitive in the marketplace. Supermarkets have emerged as leaders in addressing concerns about health and wellbeing that are likely to become even more important to consumers shaken by the pandemic. Supermarkets are acting by providing products that address specific and general wellness concerns, including those such as food purity, transparency, sustainability and fair trade.

Stern characterized speculation into just how much consumer shopping behavior might change in the pandemic as “the billion dollar question.”

A number of factors will determine not only how behavior will change but how it will change back to previous habits, to the extent it does. Retail isn’t the only sector that will influence what supermarkets will take out of the coronavirus pandemic. For example, Stern said, a big factor is “how quickly restaurants can recover their business. Most estimates suggest that food at home will benefit for another 12 to 18 months as we slowly normalize.”

Duration is a critical factor. The longer COVID-19 disrupts consumer behavior, the more likely supermarkets will face a shopper who demands more of them.

“It all depends on how long we need to live with the virus and how many changes to the shopping behavior are permanent. And this is dependent on when consumers will really feel safe— vaccines, treatments— and return to their old lifestyles. If this continues for a while, new behaviors will likely become ingrained,” Stern said.

For the complete Supermarket Report, see the August 17 issue of HOMEWORLD BUSINESS.