There is a battle going on among grocery retailers — the ‘Freshness War.’ Grocers are acutely aware that the quality and selection of their produce, meat, and dairy sections is the prime determinant of where consumers decide to shop for their groceries. Studies from FMI and others[1] show that the quality of produce and meat is a prime reason that people go to a particular store to buy groceries. And these are the highest-margin departments as well.
At the same time, evolving eating habits are putting an increasing emphasis on healthy fresh foods. The critical importance of fresh foods is reflected in the ways that grocers market themselves and project their brand image.[2] Witness the explosion of dedicated produce stores and farmers markets, ready-to-eat and fresh departments within major grocers, organic and ‘whole food chains,’ and the popularity of cooking, health TV shows, and other proponents of fresh fruits and vegetables and healthy eating. In this series, we will discuss:
- Freshness—the Foundation of Competitiveness in Grocery—The changing competitive landscape in grocery, evolving consumer habits and lifestyles, and growing awareness of food safety.
- Challenges in Becoming the Best in Freshness—Challenges introduced by the increasing length and complexity of the fresh foods supply chain and the distributed nature of freshness responsibility; statistics on how big the problem is and how much it costs the grocer.
- Solutions—How an end-to-end approach, monitoring temperature from the field to the retailer’s door, can help reduce spoilage and provide consistent freshness.
- Getting Started — Steps for retailers towards achieving a self-funding freshness improvement initiative.
Although we focus on produce as the examples in this piece, the same overarching challenges, principles, and approaches (with category-specific variations) apply to other fresh food categories such as milk, poultry, fish, and meats.
A Shifting Competitive Landscape
The competition in grocery retail is fierce and comes from all sides. Supermarkets account for about 40% of U.S. grocery sales, down from 66% in 2000. And it’s not just the mass merchants (Walmart, Costco, and Target) that have stolen market share from traditional grocery chains, but also dollar stores, convenience stores, drug stores, online grocers, and more.
These new competitors recognize the importance of fresh foods in the overall equation, not just in drawing customers into the store, but also in driving profit margins.
Fresh foods are extremely important to the bottom line. Grocery is a low-margin business, where after-tax net profit margins are, on average, barely above 1%. On average, produce occupies a little over 10% of the supermarket’s store footprint, but brings in close to 20% of the store’s profits. Typical gross margins on produce are around 30%, about twice the average margins on non-perishables. The high profitability of produce, meats, and dairy is one of the reasons that grocery stores are usually laid out to steer shoppers to those sections.
Changing Consumer Habits
One of the primary drivers of this increased focus on the produce section is changing consumer habits and lifestyles, with a focus on convenience and health. Increasingly, revenues and profits come from the categories in the perimeter of the store, which includes produce, meats, dairy, and deli/prepared foods, and decreasing revenue from the center store—the packaged food products. There is more emphasis on a healthy diet, which is increasingly equated with fresh fruits and vegetables.
USDA data shows that the average per capita consumption of vegetables in the U.S. during the 1970s was 358 lbs, rising to 436 lbs per person during the 2000s— more than a 20% increase. When you factor in population growth, total nationwide consumption of vegetables rose from an annual average of 38 million tons in the 1970s to 64 million tons in the 2000s, a nearly 70% increase.
Another sign of increased consumer awareness of health and safety is increasing interest and sales of organic produce, which have been growing at around 10% per year in recent years, with projections of 14% annual growth rate[3] over the next few years, much faster than the rest of the grocery sector. Organic fruits and vegetables now account for about 15% of all produce sales.[4] In short, people increasingly care about where and how their produce was grown and how it has been handled, and this is having an increasingly dramatic impact on the retail grocery industry.
Food Safety Perceptions Impact Consumer Behavior
Along with the desire for freshness, consumers have increased awareness of food safety issues. Media headlines dramatize each outbreak of food-borne illnesses due to the likes of Salmonella, E. coli, and Listeria, and the subsequent recalls. And with social media, even local or individual food safety incidents can ‘go viral’ and drive consumers away from a particular location, retail chain, or food category. These incidents can cost the industry as a whole, even when the vast majority of the specific product being recalled or highlighted is still safe, especially when there is little confidence in the ability to diagnose and trace the problems back to the source and prevent further illness.
When the public is scared, they retreat to whoever they trust the most. Previous events demonstrated that those who can provide complete confidence about the origin, custody, and condition of their products, can often keep their product on the shelf and capture even greater market share throughout one of these scares.
Regulations Driving Traceability Requirements
Public concerns about safety also resulted in increased regulation. The Bioterrorism Act of 2002 requires that traceability records[5] are kept by anyone[6] who buys and sells food in the U.S., including retailers. The Food Safety Modernization Act (FSMA) has given the FDA more authority and responsibility for food safety, and the proposed rules direct the FDA to conduct traceability pilots and define recordkeeping requirements for high-risk foods. This law places the burden of food safety and traceability onto all players in the supply chain, including retailers.
Commenting on the impact of FSMA for retailers, the Chief Science Officer for PMA, Bob Whitaker, said, “We see a lot more recalls now … our ability to detect the presence of pathogens, whether that’s in produce or anything, is really mushrooming. Traceability is a key component for the retailer and supplier. Having a good traceability program in place allows them to respond quickly and move product.”
In addition, the “Green Lane” provision of FSMA will provide expedited customs clearance to importers who provide, among other things, traceability throughout the supply chain and proof of consistent temperature controls. As these regulations become more vigorously enforced, it will become one more incentive for grocery retailers to provide traceability and monitoring throughout their supply chain.
In Part Two of this series, we discuss why maintaining freshness throughout the supply chain is so challenging and how some of these challenges can be solved.
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1 92% of shoppers say that fresh produce is their No. 1 factor in choosing a grocery store, according to a survey of consumers by Supervalu. Meat came in second in that survey (Source: Wall Street Journal “A Food Fight in the Produce Aisle”). 70% of customers shop at the store they consider to be the best place for freshness, according to a 2019 survey by Oliver Wyman. “Quality and Variety of Fresh Foods” ranked very high as criteria for store selection in FMI’s “U.S. Grocery Shopper Trends 2012.” — Return to article text above
2 Freshness is often found in the primary branding of grocery retailers. Amazon has “Amazon Fresh.” Tesco had “Fresh & Easy” but discovered how intense the competition is. Their failure to actually deliver produce at a level of quality and freshness competitive with other grocers has been cited as one of the main factors that caused it to ultimately fail. — Return to article text above
3 Global Organic Food Market Report (2021 to 2030) —”The [global organic food] market is expected to reach $380.84 billion in 2025 at a CAGR of 14.5%.” — Return to article text above
4 According to Food Dive ( Organic food sales growth in 2021), “Sales of organic fruits and vegetables rose in 2021 to reach more than $21 billion, making up a 15% share of the total segment” — Return to article text above
5 The requirements are for one-up / one-back traceability records—i.e. quantity, packaging, and lot and code numbers for all food received or sold—and that those records can be retrieved within 24 hours. For more details, see Federal Register Final Rule – 69 FR 71561 — Return to article text above
6 The rule defines who is covered as “Persons who manufacture, process, pack, transport, distribute, receive, hold, or import food in the United States,” with various exceptions listed. — Return to article text above
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