As Food Costs Soar, Small Independent Grocers Still Have One Advantage

As headwinds ranging from skyrocketing inflation to unprecedented supply chain challenges to a difficult labor market buffet the grocery industry, independents have plenty to be worried about.

In the best of times, the little guys have a lot on their plate trying to hold their own against category giants. Now, there is more than ever to consider.

John Ross, president and CEO at IGA (the Independent Grocers Alliance), spoke with PYMNTS’ Karen Webster about the threat posed by cross-vertical mega-retailers such as Walmart, Amazon and Target.

“I think it’s one of the scariest things,” Ross said, recalling how at the beginning of the pandemic, superstores’ grocery selections enabled them to stay open and also bring in sales in non-food categories, when other retailers in those categories were shut down.

He explained that this created “a massive competitive advantage” for those retailers, enabling them to “build a huge cash reserve” that puts independents at a significant disadvantage.

“If you think about what you would do, if you were one of those retailers now, as food prices inflate, you could make a strategic decision to hold your prices, use that cash reserve in order to be more competitive at the time when other retailers couldn’t compete,” he said. “It would be the kind [of] thing to keep you up at night, if you were an independent trying to win.”

To give a sense of the uphill battle independents have when taking on Walmart, the mega-retailer’s customer base in grocery is three times that of its closest competitor, according to data from PYMNTS’ January study, “Decoding Customer Affinity: The Customer Loyalty to Merchants Survey 2022,” created in collaboration with Toshiba Global Commerce Solutions.

Get the report: The Customer Loyalty to Merchants Survey 2022

The study, which drew from a survey of more than 2,000 United States consumers, found that 28% had purchased groceries from Walmart in the previous 30 days, compared to only 9% who had done so from Kroger.

Gaining Back Share of Stomach

During the pandemic, food and beverage businesses saw a shift in eating habits from grocery to restaurants, with consumers increasingly turning to restaurants to meet even their food-at-home needs. Research from PYMNTS’ 2021 “How We Eat Playbook,” created in collaboration with Carat from Fiserv, found that as of last year, consumers were 31% more likely to buy meals for delivery or pickup than they were to dine on-site.

Read more: Restaurants and Grocers See Path to Picking up 200M New Customers

Now, however, with rising prices encouraging consumers to spend more cautiously, there is an opportunity for grocers to gain back customers from restaurants.

“One of the big advantages for grocery industry and for independents specifically is rethinking your competitor set,” said Ross. “So yeah, Walmart, yeah Target, yeah Kroger, but also Red Lobster and also McDonald’s.”

He noted that as many McDonald’s locations have been turning away from dollar beverage deals, these decisions create “an opportunity to maximize the shopper spend by helping them eat at home.”

The Local Advantage

While independents are, in general, hit harder by industry headwinds than their larger counterparts, they do have certain advantages when it comes to navigating some of the food supply chain challenges facing grocers today.

“If you can shorten your supply chain and buy from local farms and local producers, you should have a lower cost of goods,” he said, adding that these goods are also fresher and better tasting. “Those are massive competitive advantages for retailers that tend to be in areas of the country where there’s a lot of food production.”

He noted that independents also tend to have their own butchers in their stores, giving them greater control over portions and packaging at a time when meat prices are skyrocketing.

The Future of the Independent

In this inflationary environment, Ross argued that there is not much to fear when it comes to where middle-income consumers and “more economically insulated shoppers” spend their money, but he is “really worried” when it comes to “the marginal middle class, two-income working families” who have to make tradeoffs when it comes to, say, spending on food or spending on gas.

As such, he asserted that independent grocers and the brands they stock will “have to be much more overt” when it comes to making food purchases possible for these consumers.

Still, even in the face of all these headwinds — and even with mega-retailers’ advantages over independents — Ross contends that the independent sector has enough advantages to remain a significant part of the industry, especially as smaller grocers “figure out how to apply digital tools” to drive growth and loyalty.

“A thoughtful entrepreneur in the grocery industry in the independent sector actually has a huge competitive advantage in a lot of ways,” Ross said. “Consumers are fascinated by supply chain, and local is very powerful. And real butcher, real produce departments, real bakeries — those are huge competitive advantages.”

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