Guest Post by Matt Gutermuth, Founder G7 Leadership
The moment Julia Child burst on the culinary scene some 50 years ago, bringing refined French cuisine to the masses, Americans tastes and preference changed forever. Today, with celebrity chefs getting constant exposure on Food Network and through traditional media, names like Bobby Flay and Rachel Ray are now as recognizable as major sports figures.
And we now have an entire consumer segment of foodies that eat out more often and are much more discriminating about what they buy at the grocery store. They want organic, grass-fed, and locally sourced whether they are out at a restaurant or shopping their neighborhood grocery store. In 2016, for the first time in history, retail sales at US eating establishments surpassed those of grocery stores.
And there has been a steady supply of new restaurants to meet this demand. In 2001 there were 469,018 restaurants in the country. By 2016, the number had jumped to just over 600,000, an increase of 30%.
But if you start to dig a little deeper into the restaurant growth story, there are some troubling signs and legitimate concerns about overcapacity — or dare we say a “bubble.” According to NPD Group, in 2016 the number of independent restaurants in the US dropped 3%, and the overall number of restaurants (independent and chain) fell by 1%. While certain segments of food service are maintaining moderate sales growth, NPD data show that the casual dining and midscale/family dining segment continues to show weakness, with visits to casual dining restaurants falling by 4 percent and midscale/family dining by 3 percent in the first quarter of 2017. In fact, dining out has started to take on a different meaning with restaurants facing further pressure from food retailers like Whole Foods and Wegmans offering prepared foods that can be consumed on site. Would be foodies also have other ways to get their gourmet fix without actually going a restaurant. A growing number of online providers like Blue Apron deliver restaurant-quality meals with all the prep work already done.
As we look to the next decade and beyond, there are larger trends that threaten traditional grocery chains as well as restaurants. As they start to play out, we will see the greatest disruption in food service and retail in the last 50 years. The first major disruption will be dramatic changes in how and where consumers purchase and consume meals, with convenience and choice going to entirely new levels. The other related trend will be the emergence of technological innovators and masters of logistics as the new leaders in food retail and food service.
We are already seeing the first signs of blurring of lines between food retailers and food service, as prepared foods become a growing and more profitable segment for grocery stores. Leading the way are Whole Foods and Wegmans, with that latter now taking over Trader Joe’s as America’s favorite grocery chain. The research firm CRC projects that five years from now prepared foods will represent 6.7% of grocery store sales, up from just 1.7% five years ago. They estimate that prepared food sales could increase from $15 billion five years ago to exceed $65 billion five years from now. Now, “going out” to eat no longer means a trip to your local restaurant, but is more likely to be Wegmans or Whole Foods. For every dollar spent dining out at either of these grocers is one less spent in a local restaurant. The reason food retailers have been successful at growing food service is that they meet all the essential elements that drive consumer behavior, which according to NPD’s Warren Solochek, include “convenience, quality food, value, and the experience.”
Lessons from Walmart
When Walmart entered the grocery business, there was a good bit of skepticism, with established grocery chains scoffing at the notion that a traditional retailer could possibly be successful selling food. “They don’t know our business,” was the mantra at the time. Starting in the late 1980’s, Walmart proved to be a fast learner, launching their first Superstore in 1987, they are now the largest “grocery store” in the country, with over 21 percent market share of the U.S. traditional grocery industry. They were able to achieve this dominance in large part due to their mastery of logistics honed over the previous decades. They became, in essence, a logistics company that happened to be in the food retail business, with inventory management and cost control that is the envy of industry. Now having achieved scale, they are influencing food pricing in the grocery sector, putting downward pressure on competitor’s profitability.
The Future with Amazon
The latest and perhaps most disruptive force now in the industry is Amazon. With the acquisition of Whole Foods, Bezos has done what the naysayers claimed he couldn’t do — quickly scale a physical presence across the U.S. With over 450 stores located in prime locations, he’s done just that. So, what does this mean for the industry, and what players will be impacted the most? Food retail? Food Service? The short answer is all of the above. Amazon’s move into this space is an absolute game-changer, and the impact will be felt across restaurants and grocery stores as Amazon brings core capabilities that are essential to winning in the future: delivering a superior customer experience using technology and mastering supply chain and logistics.
Amazon is betting that they can innovate and execute better than the incumbents by using technology and analytics to change how consumers as well as culinarians buy, prepare and consume food. They have redefined choice and convenience for consumers in the online retail world, and who’s to say they can’t do the same for food service or retail. Amazon has already begun investing in building out local distribution centers that enable same day delivery of merchandise. How soon will they scale up food delivery to the home? Or, perhaps even more significantly, when do they start supplying directly to restaurants, offering chefs and owners the same choice, convenience and price transparency that online consumers enjoy now. And, by the way, those chefs and owners are most likely already Amazon customers through Amazon Business. Will Amazon, now that Whole Foods is on board, be able to truly scale farm-to-table with better technology and logistics? Can they deliver the impossible: size, scale, and highly differentiated offerings?
Food retailers, food service and the entire ecosystems that support them need to reevaluate everything they do, starting with the customer experience using the Amazon standard as a baseline. They need to ask themselves whether the product or service they provide is fast, convenient, transparent, easy? They need to look across all customer touch points to determine what can be improved or automated. They need to examine systems that support order management, order fulfillment, pricing integrity, and delivery to identify gaps in capabilities or intelligence that put constraints on their ability to improve the customer experience.
Finally, they need to challenge all existing performance standards as it pertains to the customer, and ask whether they are good enough to compete in the future. Perhaps the most important first step is to realize that the competitive landscape just shifted dramatically and only those able to adapt and change will survive.
About Matt: Matt was formerly President & CEO, Safeway.com, and held senior executive positions at Sysco and Winn-Dixie. He is now founder of G7 Leadership, inspiring others to be great leaders by sharing over 25+ years of leadership experience to help others navigate change.
Photo credit: Premshree Pillai via Visual Hunt