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Grocery Wars Effect Small Chains

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The retail industry has been impacted by rapid advances in technology, consumer tastes and trends, and shifts in how their business is conducted, more so in the past few years than in the past 30. With rapid change comes the need for rapid reaction, and as seen by the fall of Toys R’ Us, countless grocery chains, and department stores alike, these seismic shifts are facing retailers across all niches.   Arguably, the supermarket industry has been affected more than any other, especially in the past year.

Small chains and even mid-size organizations are on shaky ground, finding ways to adjust and remain profitable after the $13 billion purchase of Whole Foods by Amazon. Walmart, another giant, continues to infiltrate the retail grocery space and now is planning to expand its offerings to include online grocery delivery service in 100 cities.

Regional chains like Winn-Dixie and Bi-Lo are examples of regional chains that are also filing for Chapter 11.  A recent New York Times article in Business Day entitled, “Grocery Wars Turn Small Chains into Battlefield Casualties” points out that the pressure is coming in many directions, including penetration from Amazon and Walmart, but also from the debt they may be saddled with that makes it nearly impossible to be competitive in a congested market.  As private equity firms get into the grocery business, their financial backing is, in some cases, leading to an uphill (and perhaps losing) battle.  In fact, from his office here in Paterson, New Jersey, John T. Niccollai, President of Local 464A of the U.F.C.W., which represents our grocery workers along with those in New York, commented, “The private equity owners try to drain every last ounce of blood from these companies.”

Furthermore, margins are already slim and the wholesale cost of groceries has been rising. How does a single grocery store operator increase product shelf prices to compete with the likes of Amazon and big box retailers? Theoretically, a completing big box store, can afford to offer deep discounts to its customers for a long enough period of time to force that single store operator out of business.

With discount stores siphoning off cost conscious shoppers, the fate of local grocers rests with rapidly adapting to these industry changes, as well as being conscious of cash flow (including projections), and monitoring their profit and loss statements for ways to cut expenses where possible.  Additionally, owners can continue to innovate and find ways to offer special deals and extraordinary customer service to counteract the pricing advantages of the large chains.  Many grocers already provide high-end service, specialty prepared foods, and grocery delivery, to name some of the more recent adaptations.  Only time will tell if they can continue to remain relevant in this swiftly changing marketplace.

Chris Martin, CPA

Sobel & Co.