Biggest Change For Industry Is Competing Formats
Over the past five years, the rankings of the major players in the grocery wholesale arena have remained the same, with one key exception—the demise of Fleming, which had been among the top five for years.
“The collapse of Fleming, though unfortunate, fueled optimism for the industry because it opened up a lot of new business for all the other wholesalers,” recalls John Block, executive vice president of the Food Marketing Institute in Washington and president of its Wholesale Division. We’ve seen a lot of consolidation in the industry. Many have doubled the size of their business, like Supervalu and C&S, but even the smaller ones have grown.”
And, following Supervalu’s example, “we’re also seeing a lot of wholesalers who are becoming retailers, and getting into very specific logistics operations as well,” Block adds. “They’re all providing more services to differentiate themselves. They’re all looking for that one magic thing that they will be able to do differently from everyone else.”
And with it, “the demise of the independent retailer continues,” adds Pat Turpin, a partner in Bayside Ventures, a Los Angeles-based investment firm that works with companies in emerging food businesses. “The classic customer base for the distributor/wholesaler is dying out, so that Supervalu and others are buying up retailers to become their own best customers.”
That has spawned a new era of wholesaling. “They’ve all changed significantly relative to how we see them. They all are distributors now with their own stores,” says Richard Kochersperger, a professor of food marketing at St. Joseph’s University in Philadelphia.
Part of the big reason for this sudden change has been the growing number of retail formats to rival traditional grocery stores. Supercenters and chain, drug, dollar, convenience and club stores are stealing market share from supermarkets at an alarming rate.
“In 1988, nearly 90 percent of all groceries were sold through traditional grocery stores. Now, it’s about 55 percent, and I think it will go under 50 percent by 2008-2009,” predicts Jim Hertel, senior vice president of Willard Bishop, based in Barrington, IL. “Within three to four years, grocery stores will sell less than half of all the groceries bought in the United States. There are a lot of places seeking to leverage the value of food, and as a result, wholesalers are seeing a lot of their traditional grocery customers continue to see declining rates of growth and business.”
As a result of this, many smaller or independent grocery retailers are shutting their doors are being swallowed by larger chains. The grocery stores that remain are forming cooperatives to stave off competition from the likes of Wal-Mart and other non-traditional grocery retailers. The coops usually are affiliated with one wholesaler that supplies all the stores in that buying group.
Their business model has been working well. The top grocery cooperatives earned $31.4 billion in revenues during 2004, a 10 percent increase over the previous year, according to figures by National Cooperative Bank, which provides financial services to U.S. co-operatives and other member-owned organizations.
The NCB Co-op 100, which tracks revenues generated by the nation's top 100 revenue-earning cooperatives, showed that grocery cooperatives had the second strongest presence on the list, with 19 businesses ranking in the top 100. Other businesses with a big cooperative presence include agriculture and energy.
But despite the apparent success of some, “wholesalers in general are going to have to find more and more ways to support a declining market base,” says Ryan Matthews, president of Black Monk Consulting, Eastpointe, MI. “Somebody will have to figure out what to do with these new retail formats.”
To regain some of their lost market share, many wholesalers have turned their attention to winning large chain accounts while walking away from some smaller accounts. That seems to be the model that C&S Wholesale Grocers adopted, according to Matthews, and it also seems to be working.
“C&S Wholesale Grocers just picked up A&P as a client, after having already gained Stop & Shop and Safeway not too long ago, and are finding it a lot easier to deal with one account that has 700 stores than with 700 accounts with one store each,” he continues. “Going after these large accounts creates a margin where there was none before,” he says. “Volume is a big factor in how much money you can make, and it gives you leverage with the manufacturers.”
“It’s also a time when high-performing businesses will be able to take business away from low-performing ones,” notes Janet Hoffman, managing partner of retail practice in North America for Accenture, San Francisco.
“The wholesalers that are not paying attention to the changes in where consumers are buying their groceries will be digging themselves into a hole that they might not get out of,” Hertel continues. “Wholesalers need to help their retailers keep the business they’ve got and capitalize on new business opportunities that are available.”