The grocery industry remains one of our nation’s most vital and essential operations, as it meets the needs of the rapidly changing consumer.
Our nation’s independent grocers with 21,000 stores, representing 25% of the retail grocery industry sales, $140B in annual sales, and 1% of the United States GDP,  are a significant portion of the overall food services industry.
The independent grocers, along with their wholesale distributor partners, are now faced with emerging competitive and economic forces.
These forces include evolving consumer behaviors, an increasingly complex competitive landscape, the growing impact of the digital juggernaut, increasing cost of goods, accelerating margin pressures, relentless innovation with both store formats and products.
There is a clear imperative to reduce costs and improve profitability by de-investing to reinvest. The global COVID19 pandemic has accelerated the impacts of the emerging forces.
With so many unprecedented disruptions, now is the time to build upon the relationship between the independent grocer members and their wholesale distributor partners. The two groups have established a working relationship built on a foundation of trust and shared economics.
This ongoing partnership is key to protecting, sustaining, and empowering the independent grocers to compete in the age of Amazon and Walmart.
Amazon and Walmart have already dominated a significant portion of grocery retail and digital commerce. The COVID19 pandemic has accelerated their already substantial businesses and buying power.
While grocery remains a margin squeezed business, it stands at $700 billion a year. Food and beverage remain one of the largest single categories of consumer spending. No other category offers the frequency of consumer traffic and the share of wallet that grocery does.
Grocery and wholesale distributor consolidation trends
The grocery industry has been in the midst of an ongoing consolidation trend since 2015 when Albertsons acquired Safeway. We should expect that about 30% of existing store chains will be acquired by 2025.
The pressures around managing the costs to serve, logistics, and the evolution of technology may necessitate consolidation as a strategy to remain competitive. Independent and regional players continue to be vulnerable to being acquired as national chains, and digital commerce impacts their businesses.
With the looming competitive threats, we have also witnessed a parallel consolidation in the wholesale distributor space. There are fewer wholesale distributors today, as compared to over ten years ago.
The market share of the four largest wholesale distributors went from 52% in 1997 to 87% in 2010. As independent grocers and their wholesaler distributor partners consolidate, manufacturers at the end of the supply chain may feel the squeeze from fewer and bigger buyers that have more buying leverage.
Disrupt or be disrupted: evolving and partnering with wholesale distributors
With the emerging competitive forces and disruptions, the risk of remaining idle is stagnant growth and irrelevance. Most independent grocers have partnered with wholesale distributors for their procurement, distribution, and merchandising needs.
However, in these uncertain times, deliberate disruption is a strategic path to sustainable growth and success. Independent grocers and their wholesale distributor partners can achieve competitive advantages without disrupting their daily operations. The most successful companies can self-disrupt while continuing to deliver and execute against their brand promise.
Self-disruption requires accelerating your speed of execution as well as your agility to adapt and capitalize on new opportunities. We have identified key areas where independent grocers and their wholesale distributor partners could strengthen their collaboration model to de-invest to reinvest, drive sustainable change, reduce the cost to serve, increase revenues, and improve profitability:
- Enhance digital technological capabilities to meet the needs of a competitive landscape
- Drive cost improvement opportunities in micro-fulfillment, logistics, and transportation
- Rationalize assortments, increase private labels, drive localization and profitability
- Optimize procurement processes, resulting in a lower cost of goods
- Identify opportunities to enhance member services and reducing cost-to-serve
Digital acceleration in the age of COVID19
Grocery consumers always have and will continue to define, how, when, and where they will shop for food. While grocers have grown their online capabilities, the emergence of the COVID19 pandemic has accelerated digital commerce to unprecedented levels.
Digital grocery sales grew 22% in 2019 and, propelled by high demand from continued nationwide COVID19 lockdowns, and stand to surge to around 40% this year. 
Digital touchless commerce, which includes home delivery and curbside pickup, has surged to new levels as well and requires grocers to adapt their operating models, to be far more flexible, agile and resilient to the changing landscape.
Kroger, with its “Restock Kroger” initiative, have significantly expanded their micro-fulfillment capabilities and is planning to build as many as 20 automated warehouses through a partnership with the U.K.’s Ocado Group PLC.
The “Restock Kroger” initiative has contributed to double-digit sales gains in the first quarter, 19% comp store increases, and digital sales soaring to 92%
We believe the winners in the digital touchless commerce race, will be those that deliver an excellent and consistent customer experience the fastest, and at a lower cost to serve. As the pandemic progresses, we encourage independent grocer members and their wholesale distributor partners to invest in the following areas:
- Automate processes in warehouses and distribution centers
- Establish a localized system of micro-fulfillment centers
- Identify an ROI operating model overtime to pay for micro-fulfillment investments
- Create end-to-end supply chain capabilities that take advantage of AI and ML
- Expand assortments across physical and digital shopping channels
Assortment optimization, localization, center store and perimeter innovation
Less is more, as the independent grocers are moving to sell fewer products in stores, cut operational costs, reduce consumer friction, increase revenues, and drive profitability.
Assortment optimization and localization strategies are a priority for a grocery industry that has faced an excess of choice, margin pressures, strained supply chains, and rising costs. Curating product assortments could ultimately make the entire grocery supply chain more efficient.
Assortment optimization enables grocers to concentrate their focus on the profit and value drivers. The average number of SKUs in grocery stores declined 7.3% during the four weeks ending June 13, according to insights provided by Nielsen. 
A data and analytics first strategy will help identify the SKU laggards, enable you to replace them with new innovative product offerings that will improve profitability, and serve the local market needs. Having access to consumer data from transactions and loyalty programs, grocers can develop a private label line that provides significant value and quality.
The center store assortments will continue to shrink, with approximately 40% moving online by 2025. Our approach is to help grocers define the optimal strategies to rationalize their center store. We have identified the top commodity and repeat purchase categories that are most likely transitioning to digital channels.
- Snacks, dry packaged goods, canned and bottled goods
- Personal care and household products
- Non-alcoholic beverages
- Pet care
- Frozen foods
Profitability and growth will also come from the differentiated innovative perimeter, and store formats driven by valuable insights from consumer baskets. We have identified critical areas of opportunity to address the rapidly changing consumer behaviors and drive four-wall innovation initiatives:
- Improve ancillary food services – grocer-aunts and prepackaged self-service bars
- Expand fresh & perishables – local sourcing, farm to table and expanding fresh promise
- Curated category expansion – integrating growth categories and fresh in center store
- End-cap merchandising platforms – seasonal distinctiveness and promotional design
- Format innovations – assortment tuning, private label, and category innovation
- Redesign of frozen – frozen category architecture and packaging innovation
A mutually beneficial partnership is key to grocery and wholesale distributor growth
There are advantages for independent grocers to be members of a national wholesale distributor cooperative. Through this partnership and collaborative data sharing, there is a clear opportunity for the buying cooperative to optimize the procurement processes.
Information sharing is one of the key levers to improve the cost of goods sold, strategic decision making, and competitive differentiation.
By acting as a unified cooperative procurement organization, there are clear opportunities to improve member profitability and growth, drive cost savings, and working capital efficiencies. We have identified the critical cost of goods sold improvement levers:
- Streamline branded goods product assortments
- Increase private label penetration
- Enhance trade funds realization strategies
- Improve promotional spending
- Optimize integrated planning and strategic sourcing
In the theme of de-investing to reinvest, there are opportunities to enhance the wholesale cooperative member services and reduce the overall cost-to-serve.
Every grocery member has unique requirements and services needs based on the size of their organization and its capabilities. We have identified strategies to meet the needs of diverse cooperative members and reduce organizational redundancies:
- Define core and a la carte service offerings
- Identify value proposition improvement opportunities across service offerings
- Define and align on a new tiered service model
- Assess the current utilization of crucial service offerings across member base
- Align on potential non-essential service offerings and redundancies
There is no time like the present to take bold action
Our recommendations for independent grocers and their wholesale distributor partners center on three dimensions; driving operating cash management, increasing clarity on ways to reduce costs, and prioritizing investments to drive real and profitable growth.
The competition is harnessing the power of technology to improve operations and draw consumers away from independent grocery stores.
As independent grocers and their wholesale distributor partners face uncertain times, time is of the essence to take the necessary critical actions in the increasingly complex competitive landscape.
Revitalizing profitable growth is not feasible without strengthening the partnership and making courageous and bold moves.
Brandon Rael is a trusted advisor with significant strategy, operational improvement, profit optimization, organizational change, and technology experience in the retail, wholesale, consumer goods, and consumer-facing industries.
Having worked for and in partnership with Fortune 100 companies, Brandon has a deep understanding of the retail market landscape and the evolving consumer mindset. He is a valued partner for companies as they evolve, adapt, and grow.
 National Grocers Association 2020 Findings
 The Race to Reinvent Grocery – Forbes
 30% of existing store chains will be consolidated by 2025 – Star Brokerage
 As Independent Grocery Stores Wane and Amazon Looms, Wholesale Middlemen Merge – Food & Power
 Online grocery sales to grow 40% in 2020 – Supermarket News
 Grocery Delivery Goes Small With Micro-Fulfillment Centers – The Wall Street Journal
 Kroger posts double-digit sales gains in first quarter – Supermarket News
 Why retailers and CPGs are moving toward selling fewer products in stores – Food Dive