The Fascinating World of Grocery Retail Supply Chains Explored

I’ve always been fascinated with grocery retail supply chains. I spent 4 years working for Ahold USA, the U.S. corporate parent of the Stop & Shop and Giant-Landover chains, and I worked at a Stop & Shop store for 7 years before that. These large, complex retail chains operate on razor thin margins, making the efforts of procurement absolutely critical to maintaining operational efficiency and building market share.

But my personal history isn’t the only reason I love watching this industry – the thing about grocery stores is that we are all familiar with them, regardless of our profession, industry sector, or location. When you walk into one of these stores, you come face to face with the proficiency (or lack thereof) of their supply chain. Grocery retail supply chains are personal for all of us.

Amazon’s acquisition of Whole Foods has certainly stepped up the level of general media and business coverage of grocery retail in recent months, but that’s not the only story worth telling about this industry right now. The following trends offer an interesting look into the dynamics of multiple players in the supply chain – and may offer lessons for other industries as well.

See-saw advertising budgets

Consumers are subject to a double advertising effect in grocery retail; we are marketed to by consumer packaged food companies (Campbell’s, Proctor & Gamble) and also by the store chains themselves (Wal-mart, Kroger’s). CPG companies (including packaged foods) have been scaling back their investments in advertising, citing downward pricing pressure from retailers and a lack of results traceability from digital marketing. Firms such as Nielsen are already feeling the pinch, and there is speculation about whether Facebook will be next.

Grocery retail chains, on the other hand, are increasing their advertising investments, often focusing on traditional mediums (such as at-home mailers) rather than digital channels. As a recent Wall Street Journal article explained, “Discounts and promotions like buy-one-get-one-free deals are crucial for sales growth, particularly in categories that aren’t expanding, such as cereals and frozen meals.”[i]

Although it can’t be considered full vertical integration, there does seem to be a similar effect playing out in terms of the ad budgets in the grocery retail supply chain. Rather than both brands investing in advertising, retailers are leveraging their critical role as the direct point of contact with the consumer to demand lower prices from producers, increasing their ad spend. CPG companies are scaling back their investment, using the additional margin to lower their prices in alignment with retailer expectations.

The disruptive growth of meal kit delivery

Consumers are displaying a growing preference for food options they see as fresher and healthier than traditional packaged foods. Not only has this changed which supermarket departments they spend their money in, favoring perishables over packaged foods, it has also fueled the growth of the home meal kit delivery business (Blue Apron, Plated). For several reasons, this trend is not benefitting the grocery delivery services with whom they compete. According to a recent Supply Chain Dive article, consumers are reluctant to have someone else select their groceries – especially in the critical perishable categories.

According to the same Supply Chain Dive article cited above, home meal kit delivery providers aren’t finding an easy path to solvency, struggling in particular to manage their supply chain costs. These expenses can hurt their sales and erode their margins if not addressed strategically.

Ironically, it is the combined capabilities of Amazon and Whole Foods that may disrupt these disruptors: pairing Whole Foods fresh/organic brand identity with the formidable (and pre-existing) Amazon logistics network. In the end, this may be a case of two non-traditional players in the grocery retail industry conquering an unexpected competitor of traditional grocery retail.

Closing Thoughts

In a climate of increasingly ‘consumerized’ corporate supply chains and procurement, every industry would do well to study the trends and events in grocery retail. The familiarity of grocery stores belies the complexity of their supply chain and category management achievements to date. As pressure from new market entrants and altered food preferences collide, professionals all the world over must rise to meet similar challenges to the ones facing grocery retail supply chains.

[i] Annie Gasparro, Sarah Nassauer, and Heather Haddon, “Big Food Faces Pressure from Retailers Demanding Discounts,” Wall Street Journal, September 1, 2017.