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The brick-and-mortar retail "ice age" is quickly enveloping traditional grocers in its big chill.
As if more brick-and-mortar competition on the ground isn't bad enough, grocers are now being forced to chase customers who are tired of old-style consumer packaged goods (CPG). They are being wooed away by fresh food upstarts, meal-kit delivery services, "basket bandits," and the Amazon.com Inc. (Nasdaq: AMZN) army with its never-ending onslaught of online marauders.
Competition and structural disruptions in the $649 billion grocery space (as of 2016's total revenues), with its average profit margin of barely 2%, are going to create new winners and kill off the slow-moving, undercapitalized, and overly indebted big-name grocers.
The German Grocer Invasion
Gone are the days of big grocers trying to inflate thin profit margins by pumping up sales volume per store. There are too many big, aggressive competitors in the already overcrowded space, driving down prices and picking up market share for that to happen.
Traditional grocery chains have been increasing shelf space to offer more goods. At the same time, they've had to cut prices to compete with the likes of Wal-Mart Stores Inc. (NYSE: WMT), Sam's Club, Costco Wholesale Corp. (Nasdaq: COST), and other big-box retailers, not to mention Amazon and online grocery purveyors.
Into the rocky sea of competition, big brick-and-mortar grocers are also being challenged head-on by discount foreign grocers planting their flags here in the United States.
Germany's giant no-frills grocery chain Aldi, with its popular private-label brands and "hard discount" business model, has been opening stores in the American heartland and plans on adding to their store count on the West Coast.
On their heels, Lidl, another big-name German grocer, is planning on opening 150 "small-format" grocery stores in 2017, initially in the Midwest and eventually on both coasts.
According to ProgressiveGrocer.com:
Hard-discount formats in Germany grew from nothing to more than 40 percent of the market today. Aldi and Lidl have changed, almost overnight, from niche stores serving only low-income customers to mainstream choices that attract middle-class households and routinely win independent awards for their product quality. When we benchmarked the typical hard-discounter P&L versus traditional grocers, we found that the discounters turn a 12 percentage-point disadvantage in gross margin into a 3.5 percentage-point advantage in EBITDA. They do this with carefully designed operations that leverage deep sourcing expertise, massive sales intensity per SKU on a small number of "bull's eye" lines, low-labor merchandising and very small-footprint stores. The result is a store that can be profitable with prices up to 20 percent below Walmart's, and in locations that are too densely populated to support a Walmart Supercenter.
In addition to the frontal assault by big-box retailers and new foreign grocery chains, America's big grocers are losing business to so-called "basket bandits."
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Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
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