Supermarket casualties begin to pile up in Amazon-fuelled battle

Bloomberg

This is how the grocery industry lives now. Regional chains are filing for bankruptcy. European-born discounters are expanding, forcing competitors to keep their own prices low. And Kroger Co. and Walmart Inc., the two largest grocers in the US, are investing in technology and expanding delivery as they try to fend off an incursion by Amazon.com Inc.
It’s a bleak outlook for a sector that was supposed to be rebounding this year. A historic bout of food deflation—which fuelled a price war in the past two years—has ended, but efforts to sell more groceries online are gobbling up investment dollars. And some well-known names are crying uncle.
Southeastern Grocers, owner of the Winn-Dixie and Bi-Lo supermarket chains, filed for bankruptcy recently.
“The environment is intensely competitive,” said Jennifer Bartashus, an analyst at Bloomberg Intelligence. “And I don’t see that easing anytime soon.”
For now, Amazon is more of a symbolic threat. It acquired Whole Foods Market last year, but that provided it with less than 500 stores. The e-commerce giant’s grocery-delivery business, meanwhile, still only has a small slice of the grocery market.
Even so, Amazon’s expansion has prodded traditional stores into making costly changes—and the fears of investors have battered their stocks. So far this year, Kroger and Walmart have lost more than $30 billion in market value combined.
But the grocery giants at least have the scale and resources needed to adapt. The industry’s smaller players are even more at risk.
Along with Southeastern Grocers, Tops Friendly Markets also filed for bankruptcy in the past month. Based in Williamsville, New York, Tops has about 170 stores. Southeastern Grocers has nearly 700 locations. The company announced it was reorganising, with plans to close 94 stores.
As the pressure mounts, other regional chains could go under, according to Roger Davidson, an industry consultant. “These weaker retailers are starting to collapse,” he said.

Tight Margins
Even before Amazon bought Whole Foods in 2017, pressure was ramping up in the grocery industry, which is known for razor-thin margins. In recent years, food has proliferated at dollar stores and pharmacies, with groceries seen as a reliable drive of store traffic. The rise of meal kits also has given US consumers another dinner option, and one that often translates to less grocery shopping. All of this comes after a building boom in the industry. For years, supermarkets were seen as a safe investment because they were mostly immune to the disruptive forces of e-commerce.
“There’s been a bit of a moat around it,” said James Cook, director of retail research at JLL. That feeling of security has evaporated. In 2017, new grocery store openings plunged 29 percent as companies curtailed expansion plans, according to a report from JLL.

German Rivals
To be sure, some chains are still adding stores, most notably Aldi and Lidl. The two longtime German rivals currently account for 27 percent of the grocery stores recently built or in progress, according to data from research firm Planned Grocery.
Lidl is a newcomer to the US, but research has shown that it forces rivals to lower prices in the markets where it opens stores. Aldi has been operating in the US since 1976 and now has more than 1,750 stores. It’s spending more than $5 billion to remodel 1,300 existing stores and build an additional 750 locations over the next five years.
The remodels have included more selling space for natural and organic items, part of a bid for wealthier shoppers, according to Jason Hart, who leads the chain’s US operations. Over the last three years, the company’s organic produce sales have surged more than 200 percent. “We’ve made the Aldi concept appeal to a broader set of consumers,” he said. “The momentum we have currently is something we always thought we should have—the concept just makes sense.”
But Amazon remains a source of pressure in an industry still recovering from food deflation. And that’s unlikely to change soon.