The traditional 'food-at-home' vertical market, which is already facing trouble, is likely to see its challenges accelerate over the next few years, according to the 'Trouble in Aisle 5' joint study by global investment bank Jefferies and business advisory firm AlixPartners.
The study, which included a survey of 2,000 consumers in May 2012, found that a confluence of factors appear poised to rapidly transform the food-at-home industry. The confluence of changing demographics, economic factors and customer preferences has the potential to create a long-term disruption across the food-industry value chain that transforms where and how consumers shop for groceries as well as what products they choose.
The root cause of the impending transformation lies in changing demographics. Over the next decade the baton will be passed from one mega-generation to another as "Millennials" (born between 1982 and 2001) come of age and "Baby Boomers" (born between 1946 and 1964) enter the next phase of their lives and spending patterns. As a result, established food brands and traditional grocery stores will be pressured at both ends by sets of consumers with very different value equations.
"We envision an environment that will require increased nimbleness and a relentless focus on the consumer for established food manufacturers and retailers, and the potential for rapid growth for new concepts and products," said David Garfield, Managing Director for AlixPartners and head of the firm's Consumer Products Practice.
"Millennials clearly present significant challenges, and food-makers and traditional grocery retailers need to start making changes now to address the emerging needs of this demographic group, as in many ways we're just in the second inning of this ball game," said Scott Mushkin, Managing Director and Senior Equity Research Analyst covering Food & Drug Retailing and Packaged Food at Jefferies.
Based on the most recent projections by the US Census Bureau, Millennials over the age of 25 (the age at which income and household formation typically start to really accelerate) will make up roughly 19% of the US population by 2020, up from just over 5% in 2010. These 64 million Millennials will see a significant spending-power increase in the coming years as the median income for those households is expected to jump to more than US$45,000 from just over US$28,000. In fact, the study finds, food-at-home spending by Millennials is set to jump by US$50 billion annually through 2020.
By contrast, the Baby Boomer generation, which has had an outsized influence on consumer trends for decades, will fall to below 20% of the population in the next eight years. Baby Boomers are also set to move out of their peak-earnings years into retirement and will be more reliant on fixed incomes by 2016, and their focus will undoubtedly turn further toward lifestyle preservation. Overall, says the study, at-home food spending by Boomers could fall by as much as US$15 billion per year through 2020.
The study found that Millennials have strikingly different attitudes toward consumption than their Baby Boomer parents and grandparents, which will put great pressure on the traditional model of homogeneous brands provided by traditional grocery retailers.
"The at-home food industry is just beginning to feel the impact of this major demographic shift as Millennials rise in prominence and Baby Boomers adjust to meet the requirements of age and a fixed income," said Mushkin. "The bottom line for food-at-home industry stalwarts is that big changes are coming, and companies who don't fully understand those changes risk being marginalised."
"Convenience is king with Millennials - they expect to get what they want, when and where they want it, and they know they have options for both products and retailers. The emphasis on convenience represents a dramatic shift from Baby Boomers' priorities, and it also presents big challenges - and opportunities - for companies in the food industry," said Garfield.
Tied to the group's focus on convenience, Millennials are much less loyal to both food brands and traditional grocery stores and much more willing to explore different distribution models (online shopping, smartphone shopping, delivery services, etc.) and spread their shopping across different brands and channels (mass merchants, club stores, drug stores, convenience stores, online, etc.) to fulfil their consumable needs. Of the Millennials surveyed, 47% stated brands were "extremely" or "somewhat" important in their purchasing decision for groceries, compared to 61% of Baby Boomers (a 23% decrease). Similarly, only 41% of Millennials' total food spending is at traditional grocers, compared to 50% of Baby Boomers' total food spending (an 18% decrease).
Millennials are also more price-sensitive than Baby Boomers, and the study found that their income has a dramatic effect on buying behaviour. Among Millennials earning less than US$20,000 per year, price is far and away the most important attribute impacting purchase decisions, with 75% at this income-level citing price as "extremely important". As income rises, attributes such as product quality, healthy and natural/organic increase in importance. Broadly, the study also found that Millennials require a smaller discount to purchase private-label products.
While Millennials are more price sensitive than Baby Boomers, they are, however, willing to pay more for the specific attributes they value: convenience, freshness, health, variety (of flavours, international/ethnic cuisines, product sizes, etc.) and natural/organic. When it comes to natural/organic products, for example, 58% of Millennials surveyed said they are willing to pay more for natural/organic products, compared to only 43% of Baby Boomers who said the same.
Despite the rising prominence of Millennials, Baby Boomers will maintain significant influence on 'Aisle 5' - traditional centre-of-the-supermarket purchases - and food-makers and grocers will have to adjust to meet the needs of Baby Boomers as they age and as their finances, preferences and choices change.
The good news is that Baby Boomers, generally, are more loyal to both brands and retailers, and they remain committed to shopping the old-fashioned way: going to the local grocer armed with coupons to save money. With incomes falling, however, this generation appears less willing to pay additional money for what they desire, and these changing finances are making even the wealthiest Baby Boomers act "cheap".
"In addition to adjusting to a new financial situation, Baby Boomers are now paying greater attention regarding their food choices as a means of remaining healthy and extending longevity," said Rich VI taro, Director in the Consumer Products Practice at AlixPartners. "Taste, freshness and quality will continue to be important, as will products addressing health and wellness, and specific dietary needs tied to aging."
Jefferies and AlixPartners see "fresh and healthy" - a priority area for both Millennials and Baby Boomers - as a key area of opportunity for both traditional grocers and branded food-makers. For example, despite the younger generation's greater acceptance of mass merchants, drug stores and online vendors for everyday essentials, more than 80% of those surveyed continue to shop traditional grocery stores for fresh products.
Overall, the study sees a more demanding environment across the entire food-industry value chain. For food companies, there will be greater pressure to deliver more for less - fresher, higher-quality product, with more choices and more convenience in a shopping environment where consumers are becoming less brand-loyal and more inclined to shop across channels.
This will require food companies to be more nimble, with more innovative product development, leaner supply chains and more effective use of marketing initiatives. For traditional grocers, there appears to be a need to redefine their model, focusing on perishables while engaging or re-engaging customers in the centre store. While Millennials have yet to lock in their preferences for a lifetime, they are clearly much less loyal than their forebears to the "one-stop-shop" supermarket format, creating significant obstacles for traditional retailers. But trouble for the grocery store looks to be a boon for specialty retailers, mass merchants, club stores and even on-line purveyors of everyday items, says the study.