One thing is certain in this period of uncertainty: the coronavirus outbreak will permanently transform the grocery retail landscape. Consumer behavior is changing radically. In the wake of the pandemic, first-time users make up 41% of US online grocery shoppers. And about 35% of food expenditures—more than $2.5 trillion globally—is up for grabs as consumers shift to dining at home, experimenting with new buying channels and formats and trying out new products. The competitive balance is fluid as well because weaker retailers are struggling to maintain their positions in this unprecedented economic tsunami.
To come out as winners, grocery retailers need to make bold moves now. But doing so requires understanding how today’s crisis will impact the future—and being first to that future by distinguishing the trends that will persist from those that are transient. If past disruptions are a guide, certain shifts in consumer behavior become permanent or at least endure well after a crisis has passed. For instance, in the wake of the 2003 severe acute respiratory syndrome (SARS) contagion, the rate at which new users signed up for online shopping in China increased fivefold, ultimately resulting in the world’s largest e-commerce ecosystem. And after World War II, the number of companies producing canned goods increased by 230%; consumer demand for food with a longer shelf life grew in the wake of civilian food shortages, which resulted from the massive needs of the military. Many of these products and dozens of offshoots remain popular today.
To accurately predict what the future holds, grocers and other essential retailers need to discard many of their prior assumptions. Shifts in the business environment that we thought would take as many as five years—such as the rapid rise of grocery e-commerce into more than a relatively small channel—are instead occurring in five months. Other trends that could not have been predicted are presenting unexpected opportunities. And all these changes are happening against the backdrop of potentially the largest recession in several generations.
An outsized opportunity has arisen from the drop in spending on prepared food, a result of the emergence of COVID-19. Significantly, 35% of food expenditures is in flux, a percentage that is likely to change a few times during the stages of the outbreak. Restaurants have been closed, and takeout has declined. Almost no one has been eating at their jobs because many people have been working remotely. And with money tight and fears about leaving home rampant, consumers have been cooking their own meals to a greater degree. Meal kit sales are up since the outbreak—as much as 40% to 60% over 2019 sales in developed markets.
The new eating habits forged during this period are expected to outlast the pandemic because it will probably be some time before consumers feel safe or economically secure enough to frequent restaurants and takeout providers. In fact, 60% of consumers in recent surveys said that they plan to reduce spending at restaurants and increase at-home eating even as COVID-19 restrictions are lifted. Grocery retailers with the vision to capitalize on consumers’ changed behavior have an opportunity to build a lasting presence in the profitable in-store or at-home dining market.
To survive this uncertain period and succeed long term, grocers must proactively design strategies around the trends and behavior that are expected to outlive COVID-19. (See the sidebar “How the Grocery Market Will Evolve in the Wake of COVID-19.”) Being proactive could make the difference between riding out the next few years and emerging stronger—or failing.
Although these past few months have been a boon for essential retailers, with sales growing by as much as 100%, the windfall will almost certainly be short-lived. In fact, most countries are already seeing grocery growth stabilizing at about 5% to 15% because consumers have shifted away from stockpiling. (See the exhibit.)
The identification of coronavirus cases followed by the global lockdown frightened consumers into panic buying, stockpiling food and other essential items. But as the adaptation stage drags on—with the curve of new cases flattening and isolation rules slightly relaxing, yet virus fears remaining and the economic consequences worsening—grocery sales will decline, reflecting sluggish consumer confidence and decreasing disposable income. Lower sales volumes will mostly negate gains in areas such as prepared foods for at-home dining, and overall grocery results will be constrained.
Only when COVID-19 is no longer viewed as a real threat—perhaps at a point in the future when hoped-for virus treatments and vaccines are available—can we expect to return to something resembling normal activities and an economic rebound. At that point, grocers that have already begun to implement growth strategies consistent with new consumer behavior will be in a privileged position.
Forecasting the future is not easy, and consumer behavior, preferences, demographics, and the competitive landscape will differ in each market. But many trends that grocers will have to navigate over the coming years (in addition to the shift in food expenditures) are already emerging. They include:
With so much at stake for grocery retailers, and with a high level of uncertainty for the next few years, long-term success stories will come from grocers that make bold moves now to be first to the future. Past crises have taught us that early actors win. The relative return on investment from a major retail transformation when started preemptively in a downturn can be as high as 50%. And companies that expanded business opportunities during a downturn often report purposeful growth that is 8% above those that retrenched.
Retailers need to proactively take actions across three priorities to win the future:
When faced with the need to take such significant action, many retailers pursue what appears to be the easiest, most logical path: they sequence their crisis response. (See the exhibit.)
But for grocery retailers this type of strategy would be unwise. The landscape is changing too rapidly, and customers are realigning their behavior too radically to be reactive. The dynamics of the industry, buffeted so violently by the COVID-19 pandemic, require retailers to be aggressive. In today’s world, and the one to come as the virus ebbs, only parallel decisive actions will produce winning results. In other words, if a retailer is solely focused on stabilization now and plans to prepare for the rebound later, it will likely be too late.