…but there is debate over what that means

In 2022, groceries grew to 8.9% of e-commerce spending, and curbside pickup accounted for 20% of all online grocery orders; signs that the pandemic had landed the industry several feet away from its original position. The question of what the next “normal” for the grocery sector will look like was being hammered out in late January as industry leaders went inside for seminars and negotiations at the 2023 FMI midwinter conference.

Top of mind were issues like supply chain disruptions, labor shortages, economic concerns, the rise of environmental, social, and governance (ESG) initiatives, and — of course — changing consumer behaviors.

“One thing I learned during the pandemic is that my crystal ball has a big crack,” H-E-B President Craig Boyan told attendees. But Boyan and other leaders had valuable insight into industry trends that will define the future, post-pandemic.

The grocery store as health experience

Coming out of a three-year period defined by contagion and risk, Americans are more focused on their health. A 2022 Ipsos poll found 62% of Americans place more importance on their health post-pandemic than before. Grocers believe they can be a destination for health-conscious shoppers, with 7 in 10 shoppers preferring to purchase fresh items in-store.

Accordingly, retailers invested in the fresh category in 2022, upgrading the in-store fresh experience and bumping up staffing, as well as offering fresh meal options for online customers. As they put capital into building out this area, they are sensitive to price pressures that have crimped some spending on health.

Optimizing this category also means addressing fresh shrink, said Suzanne Long, the Chief Sustainability and Transformation Officer for Albertsons, noting the impact on store profitability. The retailer, which is in the process of merging with Kroger, has invested in a new application platform designed to track the product through the supply chain to extend its lifecycle, for a positive impact on waste reduction.

This space has been ripe for disruption, with the “affordable, sustainable” direct-to-consumer company Misfits Market acquiring Imperfect Foods in late 2022.

We also saw effects from the health boom in marketing tactics. Ranjana Choudhry, Vice President of advertising and social media at Wakefern, spoke to the power of digital circulars that promote fresh categories via recipes and nutritional video content.

Economic turbulence and the pricing gun

The grocery sector has been in the spotlight for the past couple of years for all the wrong reasons, with various products held up as indicators of inflationary pressures: from December 2021 to 2022, cereal prices went up 13%, fats and oils rose 18.0%, and eggs rose 32%, thanks in part to the aforementioned avian flu.

As a result, customers have shifted purchases: Of those surveyed by NCSolutions in mid-2022, 46% said they were buying fewer non-essential items, and 43% said they were buying only essentials. This shift supported private label brands and empathetic messaging around value and affordability.

AlixPartners research has found that 92% retail executives in the food industry believe consumers will pay more for sustainable products. So the challenge for retailers is to find a way to maintain value in the eyes of customers, deliver on a healthy experience, and yet commit to sustainability at a time when things like waste reduction require investment in new technologies.

Balance-sheet impacts from the macroeconomic environment also come into play. Action by the Federal Reserve to slow inflation may be aimed at a soft landing, but industry players are wary of turbulence in financial markets. “Access to capital has been increasingly limited, especially for smaller companies,” Scott Moses, Managing Director at investment bank Solomon Partners, told conference attendees.

On the far side of economic turbulence in 2023, retailers who focused on shoring up operations and catering to consumer pain points will have won their loyalty.

Above and beyond to ESG gains

With climate top of mind, conversations ranged from how to prepare for winter-weather supply chain disruptions to how sustainable innovation can help the bottom line, to what consumers and investors want to see from companies in terms of ESG, as industry standards on that front emerge.

The point many leaders made was that what is good for ESG can be good for business — take, for example, imperatives like reducing food waste, fine-tuning stock levels, improving logistics, and creating a more frictionless online and in-person experience. Our experience bears this out. Reducing shrink is only secondarily about better margins. It’s a self-reinforcing loop that links better freshness, strong foot traffic, and reduced waste.

Solid practices around sustainability can also bring other returns. When we compared companies leading the pack on ESG to companies lagging on ESG, we found a distinct outperformance for shareholder returns and a smaller advantage for median EBITDA over a five-year period.

Likewise, addressing labor crunch means improving governance and inclusionary practices across the industry to attract workers willing to bring their skills to this vital chain.

Boyan called on attendees to find ways to evolve the industry so as to help households, noting, “that’s going to be a totally different mindset than what we’ve had.”