Though its tough to imagine a world without them, it wasn't
until 1916 that the first fully self-service grocery store
appeared -- a Piggly Wiggly located in Memphis, Tennessee.
The concept grew slowly after that, and it wasn't until
World War II ended and suburban sprawl began that grocery stores
became so ubiquitous.
Today, the vast majority of food that Americans consume is now
bought at grocery stores.
An early Piggly Wiggly store. Source: Groceteria.
What is the grocery industry?
The grocery industry broadly includes any location where
consumers can go to obtain foodstuffs that are later prepared at
home. Typically, this meant perishable goods like meat, fish,
fruits, and vegetables, as well as nonperishable goods that were
either boxed or canned. Recently, however, many grocery stores
have begun offering pre-cooked meals for purchase as well.
Over the last 40 years, it has also become commonplace for
grocery stores to offer non-food items. Typically, these are
items commonly used around the house -- like cleaning agents and
personal hygiene products.
A Safeway store built in 1962. Source:
, via Wikimedia Commons.
Though there are thousands of small, independent grocery
stores across the nation, when investors are talking about
putting their money behind a company, they are typically
referring to one of the major publicly traded entities that has a
number of locations across either a region or the entire country.
The two largest pure-play grocers in the country are
--which combined have over 4,000 locations nationwide.
How big is the grocery industry?
The sheer size of the industry is mind-boggling. According to
the Food Marketing Institute, grocery stores brought in $620
billion in sales in 2013, with over 37,000 locations and 3.4
In terms of individual players, no company has a bigger hand
in the grocery business than
. Though food initially played a small role in Wal-Mart's
business model, the company has greatly expanded its capacity to
provide food to consumers. Today, one-in-four grocery purchases
in the United States are made at a Wal-Mart.
join Wal-Mart as a segment of the grocery business referred
to as hypermarkets -- enormous stores that weren't initially
focused on food, but because of their size and scale, are able to
offer food for rock-bottom prices.
That has left traditional grocers in a pinch. It helps explain
why Cerberus Capital Management -- a private equity firm -- has
begun buying out major players like
and a number of chains previously owned by
The only publicly traded traditional grocer to survive the
onslaught of hypermarkets has been Kroger, which has gone on an
acquisition spree over the past decade to increase its
On the other end of the spectrum are grocers with a smaller
footprint that focus on natural or organic goods. None is more
Whole Foods Market
, which is closing in on 400 locations nationwide.
Though Whole Foods is valued at almost $14 billion, it's
important to keeps its relatively small presence in perspective.
Wal-Mart has nearly 4,200 domestic locations, and Kroger
occupies over 2,500 sites.
How does the grocery industry work?
Two variables have become increasingly important within
the industry. As you might expect, the first is price. All things
being equal, the average consumer will buy food wherever it is
the cheapest. That gives a distinct advantage to those grocers
with the largest presence, as they can obtain more favorable
pricing from their suppliers, and thus offer their food at lower
prices than the competition.
Hypermarkets also have an extra advantage on price. They can
offer razor-thin margins, but make more money in the long run
because groceries are simply the carrot that gets shoppers to
enter the store. Once there, the customer is more likely to make
other non-food purchases that flow to the company's bottom
The other variable is the overall experience of shopping.
Whole Foods took what many saw as an annoying weekly trip to get
food and strove to make it more pleasant and educational.
The physical setup of the store, the strategic use of
lighting, aroma, and acoustics, and free health classes that draw
in the community have proven a huge success. The perceived
benefits of organic food took off, and the strategy has spawned
similar approaches by several smaller players like
Sprouts Farmers Market
The Fresh Market
Natural Grocers by Vitamin Cottage
Whole Foods demonstrates the careful control over lighting,
sound, and aroma. Source: Whole Foods Market.
What are the drivers of the grocery industry?
Grocery stores provide products whose demand will never
disappear, and will reliably produce a steady stream of business
no matter the economic climate. Whether times are tough or
booming, people simply need food to survive.
That being said, the landscape has been going through a
massive change in the past ten years. Hypermarkets are able
to offer food for less than traditional grocers. That's because,
for hypermarkets, groceries are just a way to get customers in
the door. Once there, shoppers are more likely to buy other,
non-food items that help the company's bottom line.
Traditional grocers simply don't have that advantage.
When it comes to the growing field of natural and organic
grocers, there's currently an arms race under way right now.
Whole Foods, Sprouts Farmers Market, Natural Grocers, and The
Fresh Market all have ambitious plans to expand their footprints
many times over. The company that's able to do this the
quickest--without sacrificing the quality of its food or shopping
experience--will likely be a great investment in the coming
More from The Motley Fool:
Warren Buffett Tells You How to Turn $40 Into
The Grocery Industry: Investing Essentials
originally appeared on Fool.com.
John Mackey, co-CEO of Whole Foods Market, is a member of The
Motley Fool's board of directors.
owns shares of Whole Foods Market. The Motley Fool recommends
Costco Wholesale, The Fresh Market, and Whole Foods Market. The
Motley Fool owns shares of Costco Wholesale and Whole Foods
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