Winter is Coming for Grocers

The grocery space has changed significantly over the last several years. Restructuring professionals know this quite well: after all, there has been a significant amount of distress among a cohort of grocers: Haggen Inc., Fairway Markets, A&P, Southeastern Grocers (Bi-Lo), Tops Market, and Central Grocers. Go back even further and you’ll see some of the same names pop up: at least 25% of the aforementioned companies round-tripped into bankruptcy court twice over the years. Scarlet 22s abound!

As do the headwinds. Cashierless stores. Big box retailers with organic food sections. Delivery. Direct-to-consumer meal kits. Tariffs. The evolution of the consumption of food is happening at a rapid clip. How does a historically low margin business compete? It’s unclear whether anyone knows. But everyone sure as hell seems to be trying to figure it out.

Consider, first, some statistics.

A recent Gallup poll published in August noted:

Despite a profusion of online services that offer busy Americans an alternative to spending time in the grocery store, 84% of U.S. adults report they never order groceries online and 89% never order meal preparation kits.

Their conclusion:

Americans overall remain traditionalists when it comes to purchasing food, relying mostly on grocery shopping rather than services that bring food to them. Services like PeaPod, Instacart, Shipt and Amazon Fresh that cut out the trip to the grocery store appeal mainly to those short on time -- parents with children younger than age 18 and employed adults. Higher-income Americans are also bigger adopters of grocery delivery, either because higher income means they can afford more groceries or because they have greater access to mobile technology like smart phones and tablets that make ordering online easier. More generally, Americans may just not like to think that far in advance when it comes to what to eat.

Because routine use of meal preparation kits is low across all demographic groups, it is difficult to speculate on what the best target markets are. The recent trend of firms like Blue Apron and Plated to selling their meal kits in retail stores may prove more successful -- offering Americans the ultimate convenience.

Bigger picture, Americans have shown tremendous willingness to make purchases online -- including when holiday shopping. Thus, it's not likely that technology is what holds most people back from adopting new digital approaches to ordering food. Food can be one of the biggest line items in people's household budget, and going to the store -- including comparison shopping among stores -- may afford more control over getting the lowest prices. Others may simply enjoy browsing a grocery store for inspiration, prefer to pick out their own perishables or not want to plan ahead for meals.

If dinner is not in the fridge, then a trip to the store or a restaurant solves the problem. And if that's too much trouble, there's always takeout.

And, yet, per Food Dive, advisory firm Brick Meets Click reported in August that: (i) online grocery spending is growing rapidly, now accounting for 5.5% of total grocery spending in the U.S.; (ii) nearly 30% of U.S. households buy groceries online; and (iii) online grocery shoppers increased their weekly online spending from 28% to 46% of their total grocery spend. In terms of e-commerce, generally, in September, eMarketer stated that online grocery sales represent just 2.8% of all U.S. e-commerce sales. But it is also one of the fastest growing e-commerce categories. Use of grocery apps is expected to increase 50% this year.

Grocers sure seem to be acting like the increase is certain.

Consider the recent news:

  • Walmart Inc. ($WMT) is piloting a new last-mile grocery service in Nashville and New Orleans, which will use personal shoppers. In fact, Walmart claims to employ 25,000 personal shoppers, up from 18,000 earlier this year. That’s basically Blockbuster Inc. Or Lehman Brothers. In a recent press release, it noted: “Combined with third-party crowd-sourced delivery providers, Walmart is well on its way to bringing Delivery to 100 metro areas covering 40 percent of U.S. households. Today, the retailer’s Grocery Delivery service is available in nearly 50 markets including Atlanta, Chicago, Denver, Miami and Seattle. Walmart’s work with third-party delivery providers continues to be a leading part of delivery strategy and important to the future, even as this pilot begins.” Walmart also recently partnered with meal kit company, Gobble. And, since partnerships are all the rage these days, it also partnered with Postmates for delivery in certain California locations.

  • Amazon Inc. ($AMZN) rolled out its Whole Foods delivery service in New York City and parts of Florida back in July. That increased Amazon’s coverage area to 24 cities. It also announced its online grocery order pickup program in August. And, of course, you can order through Alexa.

  • Kroger Co. ($KR) announced in August that it will soon launch its direct-to-consumer delivery service featuring 50k grocery items and 4.5k private label products. It will start in Houston, Nashville, Louisville and Cincinnati. It also expanded its same-day delivery service via its partnership with Instacart, which will add service to 75 markets and 1,600 stores. In Illinois, Kroger is testing self-driving delivery. Kroger also recently purchased Home Chef, a meal kit service and Ocado, a UK-based delivery service.

  • Aldi also stated that it intends to test curbside pickup and expand home delivery. It currently uses Instacart nationwide for delivery, which recently expanded from four cities to 35 states.

  • Target Inc. ($TGT) purchased Shipt for $550mm late last year to expand its delivery capabilities and expand they have. Shipt intends to be in 30 new markets by the end of the year.

Remember that old saying about taking food from strangers. Well, things have clearly changed a boatload since then. It’s a good thing the robots are efficient AF. It seems that nearly all of the big players in grocery these days are pursuing a trifecta of curbside pickup, delivery and meal kits.

Which is not to say that all of the investment is worth it. In fact, Moody’s recently cast shade on the whole prospect of delivery, saying that many retailers will “likely overspend” on the initiatives. Apparently they don’t feel compelled by the argument that Grandma and Grandpa are suddenly gonna find (technological) religion and use their mobile phones for grocery delivery.

And, also, none of this is to say that meal kits are knocking it out of the park. The businesses continue to have supply chain challenges. Hello Fresh SE recently reissued guidance, saying that its prediction that it would be break even by the end of this year was a wee bit optimistic; it now projects break even in 2019. Its stock chart has been…well, interesting:

Blue Apron Inc. ($APRN) has been rejiggering its operations and supply chain with the hope of breaking even soon. It allegedly has a plan to generate revenue growth. Mmm hmm.

Indeed, The Wall Street Journal writes:

Dozens of meal-kit options are now on the market, but the pressure is growing for Blue Apron Holdings Inc., HelloFresh and others to show results and turn profits. Los Angeles startup Chef’d ceased operations earlier this month after it couldn’t secure fresh capital to keep its complex operations going. A California food consultancy bought Chef’d earlier this week to focus on its retail operations, rather than e-commerce.

Some meal kits are starting to stabilize financially. HelloFresh hopes to break even companywide by year’s end, and Blue Apron is looking to do the same next year. Chicago-based Home Chef said it had two profitable quarters last year, and expects to have a full-year of profitability by the end of 2018.

We’ll believe it when we see it.

Restaurant delivery, on the other hand, is going bananas. Doordash recently raised $250mm at a $4 billion valuation from Coatue Management, DST Global and others. Softbank, the big behemoth in growth stage investing, was an earlier investor. Chipotle, Cheesecake Factory, IHOP and Red Lobster are clients. Not to be outdone, Postmates quickly responded, raising a Tiger Global Management LLC-led $300mm, and adding Walmart, Chipotle, 7-11, Shake Shack and others to its platform. UberEats is “big businesslooking to potentially get bigger; Uber is in discussions with UK-based delivery company, Deliveroo — itself of a $2 billion valuation. And, yet, Grubhub ($GRUB) may be the restaurant delivery company that’s winning. In July, it reported a$$-kicking earnings and the stock surged.

Grubhub (which owns Seamless) and UberEats appear to be capturing the corporate expense category.

Recode@Recode

Corporate America’s travel and expense reports show employees are choosing to order meals through online platforms like GrubHub and Uber Eats. The food delivery market nearly doubled from 2016 to 2017, and is expected to double again this year: https://t.co/Uvh567QaQ7 pic.twitter.com/k7lWi6sKoL

August 1, 2018
Are you contributing? Just wait for a downturn.

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The food space is only going to get more challenging. We didn’t even mention Lidl and Primark’s expansion strategies, a summary of which you can find here in this interesting Coresight Research report. Or Amazon’s reported plans to open up 3,000 cashier-less c-stores. Sure, that’s a different category that would seem to affect the 7-11s and Pret a Mangers of the world more than grocers, but what if the novelty of it drives considerable traffic? All of the “prepared foods” revenue grocers are counting on can peace out.

And all of this “innovation” may still be behind what Alibaba ($BABA) is doing with its grocery concept, Hema (click on the tweet, there are images).

Rishi Taparia@taps

1/ I just toured the @AlibabaGroup #newretail grocery concept, Hema, and I still can't pick my jaw up off the floor pic.twitter.com/xj8TetF9Ja

August 6, 2018
Winter is coming for the grocery space. Which grocers will keep up and survive?