In advance of this week’s Natural Products Expo West event, Walter Robb, Senior Executive Partner with S2G Ventures and former co-CEO of Whole Foods Market, shares his perspective on Covid’s impact on food retail, building on our original report “The Future of Food: Through the Lens of Retail”, published in September 2020. Tonya Bakritzes, Managing Director at S2G Ventures, provided editorial support.
The past two years represented the most dramatic transformation of industry dynamics and customer demand in my lifetime, and the pace will only pick up from here. Covid accelerated this transformation. Today, while we witness the best and worst of humanity on display during the tragic crisis in Ukraine, food supply chain disruptions will continue and even be exacerbated.
While some impacts to the grocery sector such as inflation will be shorter term, others such as consumer standards around sustainability and new commerce platforms represent a more structural shift in the industry. The grocery landscape is changing rapidly and I believe the sector will continue to rise to meet these new and evolving conditions.
Inflation
To state the obvious, the impact that inflation is having on food prices today is real. Increased production costs due to the rising costs of labor, packaging and transportation, as well as wellness, culture and compensation initiatives tied to creating a safer and healthier workplace, have led to the highest inflation rates in decades. This inflation is partially demand driven. Consumers have more money and less to spend it on due to rising wages and lingering pandemic constraints on things like travel. The supply chain is also substantially disrupted with the food delivery pipeline running at about 50-70 percent of capacity. Larger manufacturers with less flexibility are struggling to keep up with demand with some seeing outputs of less than 50 percent.
As we emerge from the pandemic and reshape the supply chain, these issues will smooth themselves out—but it will not happen right away. Prices will continue to rise in the coming year, potentially abating somewhat in the fall. It will take all of this year and perhaps longer to fully restock grocery shelves, physical and digital, and to fully revive supply chains. Because manufacturers are struggling to keep up with demand, particularly in the fresh category, they will temporarily constrict their product lines, resulting in less choice at the shelf for the consumer in the short term.
Shifts in Consumer Behavior
Covid instilled in many of us a much greater awareness of our food: where it comes from, how it impacts the environment, and how it supports our health and our lifestyles. Many consumers gained a much more nuanced understanding of how food intersects with so many other issues and really every aspect of human existence. This has bred new or heightened consumer standards for sustainability and nutrition that are here to stay. A 2021 survey conducted by Kerry found that 29 percent of global consumers today prioritize sustainability at various levels and 62 percent of consumers in North America say they are strongly influenced by sustainability when making food or beverage purchasing decisions. The numbers are even higher for the younger consumer.
These changes have opened the door for an increasing number of brands that are catering to these demands through more environmentally conscious and better for you products and greater transparency. While in the examples below I will reference S2G portfolio companies because we are most familiar with them, there are many more new companies in the marketplace today that are finding creative and impactful ways to cater to consumer needs.
Natural products start-up Big Bold Health is working to bring ingredients that support both human immunity and soil health to market. The company’s founder, Dr. Bland, established and funded a grower cooperative of small family farmers in upstate New York to produce the world’s first commercial harvest of US-grown organic Himalaya Tartary Buckwheat, a plant with a remarkable nutrient profile and unparalleled levels of immune-active plant nutrients.
Other companies, such as Once Upon a Farm, are reimagining the way everyday products are produced. The company is the largest and fastest growing organic nutrition food company for babies and children. By using cold-pressure they are able to lock in nutrients to create products which have no added sugar, dairy, preservatives or artificial or genetically modified ingredients.
Customers have also learned to shop in different ways. Online ordering capabilities with curbside pickup or delivery options are now the expectation. In addition to the rise in digital purchasing, social commerce is growing three times faster than ecommerce. Food purchasing, which was almost entirely confined to stores only a few years ago, is now a very fluid and varied experience that consumers expect to more seamlessly integrate into their lives. Territory Foods, as an example, is catering to both the flexibility and ease of online food purchasing as well as a consumer’s personalized health and sustainability standards. The company develops seasonal menus that are tailored to meet an individual's needs and have minimal environmental impact, with meals delivered once or twice weekly.
Covid has also emboldened customers to purchase more fresh foods to cook and eat at home. Early in the pandemic, retail food sales rose sharply and peaked from March 16-22 2020 with 57 percent higher food-at-home sales compared with the same week in 2019. Over the course of the pandemic this number dropped but by January 30, 2022, the value of food retail sales was still 16.1 percent above the same week in 2020. The increase in families cooking at home has provided a tailwind for fresh ingredients. In a 2021 earnings report, Albertsons noted that fresh ID sales outpaced center store sales by 500 basis points year over year and over 400 basis points versus two years ago. Kroger also reported their fresh departments outpacing total company identical sales. Grocery stores are responding by elevating fresh offerings and introducing new technologies such as vertical and indoor farming operations on site.
Longer Term Grocery Trends
Consumer demands, evolving markets, new technologies and the threats of further supply chain disruptions are substantially and permanently transforming the food retail landscape.
Digitization
Grocers have remained largely immune to digital disruption–until recently. Grocers are now expected to provide consumers with the goods and services they want through any retail channel they desire, fulfill their purchases efficiently, and offer a high standard of customer service.
While online sales accounted for 3 to 4 percent of the US grocery market in 2019, the share could hit 15 percent by 2025 as retailers invest in automation and new operating models to overcome fulfillment obstacles and enable last mile delivery. Target is already seeing 20% of consumers order groceries for curbside pickup, and 23% order groceries online for home delivery. Kroger’s online sales grew 116 percent from 2019 to 2020 and they are expected to double their online sales from 6 percent in 2020 to 11 percent in 2025.
More broadly, a recent study by marketing firm Acosta reports that nearly 70% of consumers now shop for groceries online at least some of the time, compared with about 40% at the start of both 2021 and 2020. Another analysis by Brick Meets Click, reveals that established online grocery users — those who have shopped online with a grocer for over 60 weeks — generate 3.5 times more revenue than new digital shoppers.
Today consumers have a variety of purchasing options from in person shopping to digital to D2C. Retailers must find a way to cater seamlessly to a variety of shopping experiences and retain high value online shoppers.
Democratization
Digitization can also democratize food access. Until recently, families participating in SNAP could not use their EBT cards to make online purchases. But a new purchasing program launched in 2019 by the USDA allows SNAP participants to do just that. Expansion of the pilot accelerated in the midst of Covid and the USDA says that online groceries are now accessible to 90 percent of SNAP’s 43 million users. While the program is in its early stages with a number of issues that still need ironing out, it has the potential to provide access to fresh, nutritious or culturally relevant foods to people residing in food deserts or who are unable to travel to grocery stores.
Other companies in the food retail space are also looking for ways to democratize food access through digitization. For example, S2G portfolio company Flashfood connects shoppers to grocery stores that are selling heavily discounted food nearing its best by date. The company is now working to integrate its mobile marketplace with SNAP.
Personalization
As we explored in our recent trends report, 10 Trends Shaping the Future of Food in 2022, personalization will be crucial for grocers looking to build an ecosystem strong enough for consumers to stay with them. A survey conducted by Epsilon and GBH Insights found that 80 percent of respondents want personalization from retailers and as consumer interest grows in new, exciting and nutritious foods, grocery will be no different. The growth of new digital platforms has enabled a new generation of companies that are digital natives and are able to build and scale directly to consumers. Brands have more leverage as well as direct access to their customers and usage data. The ability to collect, manage and process data meaningfully is enabling retailers to build very nuanced recommendation engines and serve individual customizers. Grocers that embrace personalization will have an opportunity to differentiate themselves in a way that may earn price premiums or heightened consumer traffic and conversion.
Resiliency
As has been said time and time again, Covid has alerted us to the need for greater resilience in our food supply chains. There are a number of ways to do this. For example, controlled environment agriculture (CEA) will become an incremental part of the produce supply chain. Companies like Soli Organic, are creating ideal growing environments that are indoors and closer to large population centers. CEA is less resource dependent and vulnerable to supply chain disruptions thereby improving local food security and reducing agriculture’s reliance on increasingly scarce land and water supplies.
Companies will also vertically integrate to control a greater portion of their supply chains. We see this happening in real time as evidenced by Kroger, Albertsons and Meijer’s efforts to vertically integrate their dairy products, Costco’s investment in a poultry production facility, and Walmart’s development of its own supply chain for angus beef. Vertical integration gives companies an extra layer of protection in the face of future supply chain disruptions, enables them to harness more data to streamline their operations, and improves transparency and reporting for the consumer. Another necessity made clear by Covid and that will also be crucial to handle climate change induced disruptions, is that food retailers will also benefit from having more redundancy in their suppliers so they can remain in stock.
Innovation
Despite current supply chain issues, this is one of the most competitive marketplaces I have ever seen. The rapidly increasing demand for foods that are plant-based, healthier and better for the planet, along with a spike in entrepreneurship and investments, have opened the door to endless innovation possibilities. The result is that consumers have lots of exciting choices to make at a time when they are also getting more comfortable with trying new things. Most of these new products and brands launch with their mission, story and sustainability and environmental commitments on full display. Not all of them will survive, but the competitive landscape will result in a steady stream of appealing and high-quality products for the consumer.
The thesis of our report The Future of Food: Through the Lens of Retail, was that “All change starts and ends with the consumer and they are demanding more from retailers than ever before.” The retail marketplace is changing daily and requires retailers to be agile in order to thrive. Grocers are being challenged to rethink their operations to meet sustainability, nutrition, personalization, access and innovation expectations of consumers as well as financial markets. Opportunities for collaboration and knowledge sharing between brands, grocers, investors and other supply chain players will be essential for capitalizing on this momentum. We look forward to working with our partners from across the food system as they rise to this pivotal moment in food retail.
