Retail predictions for 2017
It truly is going to be an interesting year, and a cadre of longtime observers expect the Trump administration to have an impact on the retail grocery sector. They also agreed on the continuation of a number of operational trends that have been evident over the last few years.
“I think it’s a safe bet that under the Trump administration, there will be a more favorable business climate, particularly in the regulatory arena,” said Bruce Peterson, president of Peterson Insights in Fayetteville, AR, and a longtime Walmart produce executive. “I don’t think we’ll see a major impact in the retail sector in 2017 as it will take a period of time for some revised rules to take effect.”
Another former longtime retailer, Dick Spezzano of Spezzano Consulting Service in Monrovia, CA, also noted the potential changes in the regulatory environment, as did almost everyone interviewed on this topic.
Spezzano said that a relaxation of rules by the Environmental Protection Agency and other federal organizations will make it easier for businesses, including retailers, to operate. While a less-restrictive EPA will have a bigger impact on the production side of the business, the former Vons produce executive said it would have an impact throughout the distribution chain.
However, the California-based consultant noted that the Golden State has its own set of regulations that tend to be more burdensome than federal rules, so California businesses, and business in other more regulated states, won’t reap the rewards that could be afforded much of the rest of the nation.
The retail grocery sector competes locally, said Spezzano, so all retailers in any state must follow the same rules, thus creating no advantage or disadvantage for competitors. Spezzano said that clearly isn’t the case on the supply side, and a relaxation of federal standards while California continues to be more restrictive should create an even more uneven playing field for California producers.
Ed Odron, a former produce executive at Lucky Stores who operates Ed Odron Produce Marketing Consulting in Stockton, CA, believes the change in tone, regulations and perhaps a cessation in the effort to increase the minimum wage could have a very big impact on the retail grocery sector.
Odron said supermarkets have been struggling to make a profit for a long time. He believes a minimum wage in the $10-15 per hour range would cut further into profits and erode innovation and training at the supermarket level. He added that every new regulation typically means retailers must add hours and personnel to deal with them.
Said Odron, “99.9 percent [of retail operations] are doing it right. All the regulations are designed to catch that .01 percent. Is it worth it? I don’t think so. All these regulations just drive up costs.”
With more money in their pockets, he argues retailers can put the money back in the stores. In his day, Odron remembers what he calls a “clean up, fix up,” whereby about every five years a retailer would spend a finite amount updating the store, to make it more attractive and brighten it up. He said those efforts are difficult to maintain in the current low-margin environment.
“I am hopeful that when these regulations go away there will be more money for store fix-ups and maybe training programs,” Odron said.
Speaking specifically of the new president, Peterson is concerned about the campaign rhetoric involving Mexico, immigration and trade.
“One area that I will be curious to see unfold is in the area of immigration. During the campaign, the president-elect was very vocal about immigration activities and how it affects national security. One of his ‘targets’ was Mexico. The produce industry is already being challenged with insufficient labor and how the campaign rhetoric will ultimately unfold bears close watching. And even though the ‘wall’ has become a ‘fence’ and is moving towards tighter scrutiny, it is certainly not playing well with the Latino population.
“I also think trade policy is going to have a significant impact on the produce industry,” Peterson continued. “While I see no real prospect that NAFTA will go away, there will be new negotiations with respect to trade with our neighbors to the south. Produce could be an unintended causality of an aggressive negotiation with Mexico on other trade areas. And much like the immigration issue, just the aggressive posturing can cause some challenges in 2017.”
Others echoed those comments, but there seemed to be a general disbelief that food production from Mexico will get caught up in a trade war.
Steven Muro, president of Fusion Marketing, a Chatsworth, CA-based company that specializes in helping suppliers and associations work with retail partners, said that while there may be a need to alter NAFTA, “Food coming into our country is much different than cars or computers.”
Operationally, the group of experts see smaller stores, more online shopping, continued pressure on the traditional, conventional supermarket, and possibly a resurgence in mergers and acquisitions.
“It’s a sure bet that physical stores will continue to move to smaller formats,” said Peterson. “And that you will see increased integration between online shopping and brick-and-mortar shopping.”
Former A&P executive Ron Pelger of RonProCon Power Produce in Reno, NV, agreed.
“Look for those mega-sized supermarkets to shrink in square footage,” he said. “Online shopping will be part of forcing it. Today’s consumers, and especially millennials, want more of a convenient ease of in-and-out shopping rather than hiking in and out of confusing aisles. Smaller stores can offer it. Besides, smaller facilities cost less to operate, which is beneficial to retailers’ bottom lines.”
Pelger added that supermarket retailers will expand promotions through smart devices, especially when targeting millennials. He said that group hates grocery shopping and retailers will use modern technology to develop new and better ways to speed up customer checkout systems.
Millennials, said Pelger, also love online shopping. “Like the organic movement, this type of shopping trend will continue to grow at laser speed. Leading companies such as Amazon and Walmart will expand distribution facilities geographically, enabling more rapid delivery time.”
Muro expanded on that theme, predicting that a new checkout category at retail will differentiate between those paying with cash and those using newer technology, such as automatic debit from their smartphones. He said today’s shopper is looking for convenience and the retailer that can tap into that best will win.
Muro added that there is a Swedish supermarket currently experimenting with home delivery in which a lock box allows access to the house and the delivery person actually puts away the groceries.
Spezzano sees the continued development of “click, bricks and pickup,” where ordering is done online and the customer can pick her order up without getting out of the car. He also expects the much smaller store footprint to proliferate, with the thought that multiple SKUs of the same product in center store is wasted space. He expects the conventional supermarket to continue to have challenges.
“We are overbuilt,” said Spezzano. “Stores are too big and the center-store is in decline.”
Pelger said those stores will continue to battle for market share but he does not expect price wars, stating that they accomplish nothing and produce no winners.
Muro sees supermarkets turning to what he called “grocerants” and “retailtainment” by offering food halls within the store that serve a variety of cuisines for eat in or take home, and making the grocery store a fun place to shop. He also believes that consumers want more information within the store, like Trader Joes offers, and he downplayed the value of “clear sightlines.”
Muro agrees that the conventional supermarket is under siege. He said they must “create a need for themselves. The big store with wide aisles will continue to flounder.”
With regard to mergers and acquisitions, Spezzano noted that the current regulatory environment has been very open to consolidation, and he expects that to continue — and even get easier — under a Trump administration. He especially expects some mergers of smaller ethnic chains, which are gaining a large foothold in the California marketplace. Currently there are several chains in the 20- to 50-store size, and synergies can be realized through consolidation, he said.
Odron echoed those same comments, expecting consolidation to continue at all levels, including growers, logistics companies and retailers. “Everyone is looking for leverage over their competitors. Size can do that. How many accounting departments do you need?”
(2017 Retail Predictions, Part 2 will appear in the next issue of The Produce News and will focus specifically on produce department trends.)