Economic Impact on Supermarkets and Grocery Stores
Aaron Ricadela | Content Strategist | May 19, 2023
The grocery business faces many challenges, including a tight labor market, sharp food price inflation, and competition with ecommerce specialists and discounters. At the same time, grocers are still adjusting to shifts in buying habits, supply chain disruptions, and worker resignations while climate change and geopolitical upheaval are straining global food supplies.
For example, harvesting and shipping constraints in war-torn Ukraine are throttling wheat and corn supplies, leading to higher prices worldwide for various goods. Food producers’ labor and transportation costs also remain high, increasing grocery prices. All these economic factors and others require grocery retailers to stay on top of the data pouring in from their stores and ecommerce channels to remain competitive.
How Does the Economy Affect Grocery Stores?
Supply chain disruptions and food-price inflation have put economic pressure on grocery stores already operating at thin 1% to 3% profit margins. US grocery stores and supermarkets, which are largely local and regional, have less purchasing power than the national chains in the UK and continental Europe. Stateside supermarkets also offer bagging and other services not standard in Europe, an additional cost.
Food retailers employ more than 8.5 million people in the US and European Union, but employee turnover is high amid competition from other service industries, increasing hiring costs. Supply chain disruptions still common in the industry have forced grocers to shift from acquiring goods just in time to keeping more inventory on hand, which increases inventory costs. The UK's shortage of fresh fruit and vegetables is one ramification of rising energy prices affecting growers’ greenhouses.
Different income classes have different spending priorities. For example, 52% of low-income consumers in Europe said they’re looking for ways to save money on grocery shopping, according to a 2022 McKinsey report. On the other hand, 34% of high-income consumers surveyed said they’re focusing on healthy eating and nutrition, a choice that isn’t always synonymous with the lowest prices.
Key Takeaways
- Due to several factors, including global supply chain disruptions, food prices have increased faster than consumers’ wages, compelling them to look for lower-priced alternatives. In response, some grocers are advertising fewer premium goods, such as steaks, and filling their circulars with ads for bargains.
- Grocery stores use data to reduce food waste, inform pricing and merchandizing decisions, and promote loyalty programs.
- Employee turnover in the sector is high, at about 50% a year, though down from 60% during the first year of the pandemic, according to FMI (Food Industry Association). Even before the pandemic, turnover rates were at least 60% yearly, according to McKinsey. That’s despite an increase in full-time employee wages and benefits during the pandemic. In the US, the average hourly pay of restaurant and supermarket workers topped $15 an hour for the first time in 2021.
Grocery Stores and the Economy: The Relationship Explained
The state of the economy directly impacts the grocery industry in terms of employment and consumer spending. Hourly wages for grocery retail workers are low relative to other service industries. The pandemic led to high turnover as employees moved to jobs that paid more or they perceived as safer. On the demand side, food price inflation has been rampant in the past couple of years, causing grocery shoppers, especially those with low incomes, to reevaluate what and how much they buy.
1. Directly Created Jobs
US grocery stores and supermarkets employ about 3.2 million people, according to the Bureau of Labor Statistics, while those in the EU employ more than 5.6 million. Hourly wages for floor workers, which average about US$15 in the US, UK, Germany, and other high-income countries, and for cashiers, which are about $13 an hour in the US, are generally lower than in other service sectors. As the economy began to recover from the financial crisis of 2008-09, grocery stores raised wages. During the pandemic, supermarkets offered hazard pay, and several US states have passed minimum wage laws that have added to supermarket workers’ pay and benefits.
2. Food Prices and Inflation
US prices of food consumed at home were 8.4% higher in March 2023 than they were a year earlier, according to Consumer Price Index data. Meantime, US wages adjusted for all kinds of price inflation (so-called real wages) fell 1.5% during the same period. Egg prices rose the most among food items—up about 55% between February 2022 and February 2023—due mainly to an avian influenza outbreak that killed tens of millions of birds. As food prices have risen, supermarkets have struggled to keep their costs down to compete with discounters angling for more market share. For example, the German discount chains Aldi, with more than 2,200 US stores, and Lidl, with nearly 200 US stores, have taken market share and are rapidly expanding. The chains have attracted inflation-weary shoppers with compact stores and items sold directly from their delivery boxes, which help keep their prices low.
3. Sales and Total Output
US supermarket and grocery store sales are forecasted to top $818 billion in 2023 and have been growing nearly 3% a year since 2018. Pandemic-era trends of shoppers making fewer trips to a smaller number of stores and turning to ecommerce for home delivery and curbside pickup are predicted to continue.
4. Online Grocery Gains
During the pandemic’s early peak, 20% to 30% of US grocers’ sales shifted to online, eventually settling at 9% to 12% of sales—still triple the pre-pandemic levels, according to McKinsey. Online grocery sales in the UK and France, which historically have accounted for a higher percentage of total sales than in the US, are projected to be 17% to 30% of total sales this decade in the UK, and 13% to 23% in France.
5. Temp Turnover Rates
US supermarkets, food processors, and distributors rely more on temporary workers amid staff shortfalls, as many of their employees left during the pandemic because of health concerns. Those food industry companies have also been hiring back retirees. Employee turnover in the grocery business is high—48% in 2021 for full-time employees in the US, according to FMI. The wages and onboarding costs for temp workers can be high for supermarkets since these workers earn more per hour than full-time employees and need more training.
6. Impact on Food Deserts
Many impoverished urban and rural residents lack access to fresh, nutritious foods. Those neighborhoods tend to lack large supermarkets nearby (within a mile in urban areas or within 10 miles in rural ones) with full, affordable assortments of products. More common in these “food deserts” are convenience stores with canned or packaged processed goods stocked. Food deserts are a particular problem for families with children, given their dearth of fresh fruits, vegetables, and other healthy foods needed for growth, according to the Annie E. Casey Foundation. US Black communities are disproportionately affected. U.S. Department of Agriculture data shows that 2.3 million people in the continental US, or more than 2% of all households, live more than a mile from a supermarket and don’t own a car.
How Grocery Retail Software Helps
Supermarkets and grocery stores use merchandising software to track transactions from various stores and online, then process, audit, and send results to financial applications. The merchandising system is a hub for store operations and lets retailers manage potentially hundreds of thousands of items from various suppliers. It can also manage orders of new items, including generating purchase orders for suppliers. Grocery retail software can also supply the bulk of data needed for a data warehouse, which performs analysis.
Grocery retail software can also help replenish stock, expand private label offerings, and provide more complete data for floor workers. Software can also help grocers personalize their online offerings to increase basket sizes and lower delivery costs. That means a grocer can analyze store sales trends, determine where changes in assortment or price can maximize revenue, then generate the corresponding orders to send to its suppliers.
Meet Changing Shopper Demands with Oracle
Oracle retail merchandising and data analytics products help grocers manage and make the most of their product assortments. Finance teams can use ERP and EPM technology to derive real-time insights into back-office finance and operations and model and plan for changes in economic conditions, such as a recession or inflation.
Cloud compliance management software is used by a who’s who of grocery retailers to manage more than 1 million private brand items yearly with more than 250,000 suppliers. The application creates detailed and accurate labels that comply with local regulations.
Get these features and more with Oracle Retail Grocery Software. The solution also uses forecasting to improve restocking for grocers. It can cluster stores in a supermarket chain with similar attributes or help retailers visualize customers’ “decision trees” and gain insights into how they shop across a wide product assortment.
Grocery Stores and the Economy FAQs
How do grocery stores fight inflation?
Grocery stores and supermarkets are combating inflation in part by offering more private-label goods. Many shoppers switched to house brands during pandemic shortages of name brands and stuck with them. For supermarkets, sales of store-brand products can be more profitable than sales of name-brand goods. Food stores are adding automation technology to cut costs, such as electronic price labels on shelves, cameras for measuring stock levels, and store-cleaning robots. They’re also automating picking goods at distribution centers to lower labor costs.
How does food affect the economy?
Agriculture, food, and beverage production; restaurants and bars; and related industries such as leather, textiles, and tobacco contributed $1.3 trillion to US gross domestic product in 2021, according to the U.S. Department of Agriculture—5.4% of total GDP. Farm output was $164.7 billion. In addition, food and beverage stores accounted for 3.3 million US jobs, or 1.7% of the total.
Why are grocery stores important to communities?
Grocery stores can act as social hubs in many communities—a place to run into neighbors, try products from local small businesses, and support community organizations. Supermarket openings have been shown to increase surrounding home values, especially in low-income neighborhoods, and can directly increase the number of jobs in the community. According to studies, supermarkets also traditionally provide various kinds of worker training, lifting the skill level of the local labor market.
What are economies of scope in supermarkets?
Supermarkets realize economies of scope by spreading costs such as rent, wages, heat, and lighting across many items sold.