Heather Haddon and
Never before in America has so much retail square footage been devoted to selling food—and it is too much.
A massive build-out by retailers has left the country piled up with grocery shelves as consumers are shifting from big weekly shopping trips to more snacking and to-go meals. The mismatch has flattened retail sales and leaves the industry vulnerable to a wave of closures that some executives, bankers and industry experts think is coming soon.
Commercial square footage of retail food space per capita last year set a record, with 4.15 square feet of food retail per person, according to CoStar Group , a commercial real-estate firm, nearly 30 times the amount of space allocated to groceries at major chains in 1950.
To be sure, major grocery chains weren’t as numerous decades ago, with many Americans shopping for food at mom and pop stores.
But the growth in groceries have extended across many types of retailers in recent years. Part of the expansion comes from grocers, who accelerated their store openings as a way to drive sales growth after the 2008 recession. At the same time, club chains, dollar stores, pharmacies—and even gas stations—increased their fresh food offerings to drive traffic and boost profits.
“Everybody is getting into the grocery business,” said David Hirz, chief executive of Smart & Final Stores Inc., a California-based warehouse grocer.
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While shopper loyalty to conventional chains lifted same-store sales for food retailers by at least 3% annually since 2013, that metric was flat in 2016 and is projected to remain static this year as competition grows, according to FactSet. “There’s only so much food we can buy,” said Suzanne Mulvee, director of research for CoStar.
The food-retail sector has become even more saturated at a time when competition is only getting fiercer, particularly at the two ends of the shopping spectrum. Growing European deep-discounters Aldi and Lidl are vying for U.S. market share, hoping their prices will win over the budget-conscious shopper while internet companies like Amazon.com Inc. are trying to lure higher-income grocery shoppers online. Regional supermarkets and conventional ones such as Kroger Co. and Albertsons Cos. are the most likely to get squeezed in the process, according to analysts.
“We’ve hit that critical moment where traditional supermarkets have realized they can’t keep opening new stores to solve their problems,” Kantar Retail analyst Diana Sheehan said.
Some grocers have already started to retrench, similar to the way the broader retail market has reduced square footage of brick-and-mortar stores as e-commerce drew away customers.
Kroger, the nation’s largest traditional supermarket chain by stores and sales, is reducing its new-store openings this year to 55 from 100, a nearly billion-dollar drop in capital expenditures, and its chief financial officer, Michael Schlotman, recently said that the company expects to continue to invest less in bricks and mortar. Smart & Final plans to build 19 stores this year after opening 37 in 2016.
Wal-Mart Stores Inc. plans to build 55 supercenters and smaller-format stores in its 2018 fiscal year, down from the 132 it opened in the 12-month period ending in January. That has helped the nation’s largest food seller by sales to spend billions of dollars renovating its stores and offer more online-order pickup, a company spokesman said.
There has been consolidation in the sector, too. Kroger and Supervalu Inc. have scooped up stores and wholesale businesses after two Midwest regional chains, Marsh Supermarkets LLC and Central Grocers Inc., declared bankruptcy this year.
But enduring changes in eating and food-shopping habits toward cheaper and more convenient options means consumers will increasingly spread their dollars among a variety of retailers. Food retailers are also chasing a shrinking pool of consumers. Not only is U.S. population growth slowing, America’s largest demographic groups—milliennials and baby boomers—aren’t at their food-buying peaks.
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“I don’t have the energy to work full-time and make my own food,” said Leah Steinberg, a 32-year-old unemployed software engineer who recently moved back in with her parents in St. Paul, Minn. Ms. Steinberg struggled to make healthy meals for herself while working, and now relies on her family to shop and cook while she searches for a new job.
Grocery executives say they have survived competition on thin margins in the past, and that they conduct detailed studies before building new stores. “We’re comfortable with the amount of square footage there is [in] the market at the moment,” said Andrew Nadin, chief marketing officer for Schnuck Markets Inc., a St. Louis-based chain of around 100 stores.
Food, beverages and other consumables account for about a third of transactions at pharmacies. Fresh fruit for sale at a Walgreens in New York.Photo: Mark Lennihan/Associated Press
But consumers are increasingly turning to nontraditional options. While about 37% of sales of consumable items such as food and beverages still take place at traditional supermarkets, with the sector posting more than $440 billion in sales last year, it was a 6% drop from 2015, according to Inmar Willard Bishop Analytics.
Meanwhile, convenience stores sold $73 billion worth of prepared foods, beverages and other food service last year, up 72% from 2010, according to the National Association of Convenience Stores. Two-thirds of sales at dollar stores come from food, beverages and other consumables, while they account for about a third of transactions at pharmacies.
Brick-and-mortar supermarket locations also compete for consumers choosing to shop online. For instance, Bill Garrett, a 55-year-old home health-care company officer from Wilmette, Ill., said he sliced about a third off his weekly grocery bill of $150 by shopping on Amazon. Amazon made a $13.7 billion bid for Whole Foods Market Inc. in June, a move analysts say could further acclimate shoppers to the concept of online grocery shopping.
Supermarket chains operating in dense areas where shoppers have more online grocery options are particularly vulnerable to future consolidation, according to Barclays Capital Inc., which said that 38 of the top 50 grocery markets in the U.S. are already too saturated by food retail per capita or are on track to be so by next year.
“Everybody should stop growing,” said Barclays analyst Karen Short. “It would make the whole industry much healthier.”