Less than a year after Amazon bought Whole Foods, shaking food retailers to their core, the so-called “grocery wars” have racked up their first two casualties: Tops Markets and Southeastern Grocers.
Tops, a 56-year-old chain with 169 stores in New York, Pennsylvania and Vermont, filed for bankruptcy late last month following years of mounting debt. Southeastern, which owns more than 600 Winn-Dixie, Harvey’s and BI-LO stores across seven states in the Southeast, announced a refinancing agreement on March 15 and says it will file for bankruptcy by April.
The back-to-back filings have fanned fears that some chains won’t make it through the industry’s current turmoil, replicating the “retail apocalypse” that has already hit American malls. The grocery business is in the midst of a radical disruption, squeezed by a range of new competitors from Dollar General to Amazon. (Amazon chief executive Jeff Bezos also owns The Washington Post.)
Analysts say the upheaval could eventually determine where consumers shop and what food is available to them. Already, Winn-Dixie has said it will close 94 stores, and Tops has left open the possibility that it could shutter its weakest locations.
“I think we’re going to see a lot of chains fail,” said Phil Lempert, an independent food retail analyst at Supermarket Guru and the author of several books about the grocery business. “There are some retailers who have innovated and stayed ahead of the trends. But they have been the exception.” (Continued below.)
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Tops and Southeastern have suffered a host of problems – problems exacerbated by the tumult in their industry, analysts said.
The two companies carry enormous debt loads, the result of management by private equity firms. The chains are also located in highly competitive grocery markets, challenged by strong regional chains, such as Wegmans and Publix, as well as major national and discount retailers.
As those companies have invested in new technologies, store formats and product lines to stay competitive, Tops and Southeastern have been largely unable to do so because they are saddled by high interest payments, analysts said. In its bankruptcy filing, Tops said that it could neither afford to offer the sort of organic, premium products its high-end competitors are pushing, nor make the sorts of price cuts that would attract a Walmart or Aldi shopper.
The pressure to evolve on so many fronts, Tops said, made it “increasingly difficult for the company to compete” with other retailers. (Tops declined to comment for this story, and Southeastern did not respond to requests for interview.)
“That is the trend now,” said Bill Urda, a senior retail analyst at Boston Consulting Group. “There is enormous pressure to charge a value price while also providing quality and service and the exact products that people want, when and where they want them.”
“It’s a tough business – and in some ways, it’s getting tougher,” Urda added.
Experts caution that grocery has always been a low-margin business, with stores eking out one to three cents of profit from every dollar spent. And for decades, America’s largest chains have been harried by the growth of Walmart and other supercenters, consolidating their market share by targeting midsize and regional players for acquisition.
But a perfect storm of social and industry trends seems to have made things worse. Consumers are spending more of their food budget on restaurant meals and take-out, shrinking the available pie for grocery stores.
At the same time, new competitors – from discount retailers like Lidl to superstores like Target – have squeezed onto the scene, cannibalizing the grocery business that’s left. Amazon’s 2017 acquisition of Whole Foods deepened anxieties that online retailers could soon be a major force, as well.
“We are operating in a different world,” said Peter Larkin, the chief executive of the National Grocers Association, which represents independently owned stores. “We now have club stores. Supercenters. Dollar stores. Drugstores. Click and deliver. Click and collect. Meal kits. Even Home Depot and Lowes sell food now. . . . The competition has always been intense, but it used to be supermarket-to-supermarket. Now it’s supermarket-to-all-those-other-channels.”
Some observers worry that consumers may not fare well in this new world, where midsize chains and small mom-and-pop stores are increasingly under attack. Such stores have their advantages, said Patty Lovera, the assistant director of Food and Water Watch, a nonprofit advocacy group that has monitored consolidation in the grocery industry.
Lovera said midsize operations are more likely to stock foods from small farmers and producers, because they aren’t locked into centralized buying contracts like larger chains. (This has become an issue at the Amazon-owned Whole Foods, which has moved to consolidate the chain’s purchasing process in a way that could limit shelf space for small and artisanal products.)
Smaller independent stores are also more likely to locate in underserved areas. Lovera is concerned what will become of urban neighborhoods and rural towns that lose their only full-service grocery store to growing competition.
Data from the Department of Agriculture suggests this is already happening: The number of mom-and-pop stores has flatlined in the past 10 years, and their share of total stores is plummeting, according to a 2017 report.
And while Winn-Dixie and Harvey’s are far from mom-and-pops, a number of those stores slated for closure are in areas where it’s a 15- or 20-minute drive to the next-closest grocery store.
“There’s this logistical piece,” Lovera said. “If your neighborhood grocery store goes away and you have transportation issues, that’s a problem.”
But most analysts say it’s premature to worry about consumer harms. For now, Lempert said, most consumers are benefiting from lower prices and better service as competing stores vie for their grocery dollars.
And even in the more distant future, analysts said, as weaker chains such as Tops and Southeastern declare bankruptcy or close stores, consumers are likely to see even better offerings from the retailers who survive. Call it Darwinism for grocers.
Lempert points to Hy-Vee, an Iowa-based retailer with 245 locations across the Midwest. The company’s newest store, a food-court-like format in downtown Des Moines, has become so popular that it’s begun eating into nearby restaurants’ business.
He also likes Wegmans, an upscale chain headquartered near Tops in Upstate New York. Unlike Tops, Wegmans has invested heavily in its customers’ experience, adding sushi bars, juice shops and even tequila bars in some of its 96 locations.
Regional chains like these will be able to fend off the competition, even from far bigger players, said Burt Flickinger, the managing director of the business consulting firm Strategic Resource Group. Flickinger points out that sales at Whole Foods’ first Buffalo, N.Y., location – where it competes with Wegmans, Tops and another strong local chain, Dash’s – have been “disastrous.” Strong local and midsize chains, he said, can still cater to their local community better than the so-called disruptors.
Tops and Southeastern don’t want to be written off just yet. In press statements, both companies have framed their bankruptcy declarations as steps toward adapting to the increasingly cutthroat grocery market.
“This will enable us to invest further in our stores,” Tops Chief Executive Officer Frank Curci said, “create an even more exceptional shopping experience for our customers and compete more effectively in today’s highly competitive and evolving market.”