When readers asked us to take a look at valuations for grocery retailers like Whole Foods Markets ($WFM) and Kroger ($KR) I yawned and thought we were in for a snooze – what’s interesting about selling turnips and kitty litter, after all.
Imagine my surprise when we started digging deeper into these businesses and realized just how much the industry is changing and just how genuinely sexy it is becoming.
We have published a lot of content about how Whole Foods has lost the battle for organic hearts and minds to Kroger (see our recent ChartBook on $WFM and our December 2015 valuation report on it), but it wasn’t until we took a closer look at Kroger’s valuation ($KR ChartBook ) that we started to realize that within a generation or so, the concept of a “grocer” is going to be very different from the one most of us are used to.
This presumed shift has a lot to do with cultural changes – a point that my partner Joe made very eloquently in his recent article – both on the consumer side and on the retailer’s. Joe’s article focused mostly on changes to consumer culture, but researching Kroger, we started finding more references to fast casual dining chains (companies like Chipotle Mexican Grill $CMG and Panera Bread $PNRA) coming under competition from supermarket chains’ prepared food areas. Thinking about Millennials’ dining preferences, some of the key drivers for attracting these up-and-coming consumers include “authenticity” and fresh, healthy ingredients. What is more authentic of a food experience than buying fresh, prepared food from a grocery store? Stores like Wegmans, Whole Foods, and Mariano’s (owned by Kroger) have taken this theme and run with it, and as a result have infringed on the turf of purveyors of upscale fast food.
While the cultural shift is already underway, we believe that the next big transformation to grocery will be related to technological innovation. “Grocery technology” may strike some as an oxymoron, but in fact a combination of the proliferation of the Internet of Things, self-driving automobiles, and the comfort Millennials and Generation Zs feel with virtual interactions will change the face of grocery completely. By 2030, the only people around who have pushed metallic grocery carts down a supermarket aisle are likely to be those who were born in the twentieth century.
Internet-enabled refrigerators will automatically place an order for more eggs, ground meat, and milk to an electronic counterpart at the local grocery “network node” (not “store” – more about that below). A robotic clerk will select and prepare the order for delivery by a self-driving car or drone. Some households may only have small refrigeration units, opting instead to have a drone deliver the pre-measured ingredients for every evening meal. A slip of paper with the order will display a QR code that allows the consumer’s smartphone to access a website with the recipe and a video showing the cooking steps.
When this day comes, the success of grocery chains will be dependent upon the quality and density of their distribution networks, the efficiency of their supply chain and inventory management systems, and the brand image they project as purveyors of prepared foods.
In the 1990s, “sexy” meant the latest Pentium processor. Since 2006, “sexy” meant the latest smartphone. In another few years, “sexy” will mean integrated household automation. In a phrase, grocery will be sexy.