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Dissecting the Decline: Factors That Shifted the U.S. Grocery Landscape in First-Quarter 2017
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Dissecting the Decline: Factors That Shifted the U.S. Grocery Landscape in First-Quarter 2017

For U.S. grocery retailers and some of the country’s largest fast-moving consumer goods (FMCG) manufacturers, the year has gotten off to a rocky start. Growth in the first three months of 2017 was slow for many categories across the store, and as a result, manufacturers have trimmed their once-plentiful marketing and advertising budgets.

The softness and slowed growth clearly illuminates how the U.S. retail landscape is in the midst of the fastest transformation it’s seen in modern history. Within the first quarter of 2017 alone, sales of FMCG at U.S. brick-and-mortar retail stores were nearly $3 billion lower than in the same period in 2016. On the positive side, however, employment rates are improving, average incomes are rising and consumer confidence is steadily increasing quarter over quarter.

So what’s behind this massive dip, and are all categories falling victim to it? Several factors are at play when comparing first-quarter 2017 to the same period last year.

The Easter Shift

Easter, a major consumer shopping moment, occurred nearly three weeks later this year than in 2016. And as it turns out, that lag appears to have had a notable effect on the FMCG market. In fact, Nielsen data for the past five years shows that roughly one-third of the total decline in the first quarter was attributable to the fact that Easter landed in April this year, which subsequently pushed dollar sales associated with the holiday into the second quarter. As a big driver of alcohol, grocery, bakery and produce sales, Easter will pay off—just a little later than last year. Candy and eggs are equally strong Easter-driven categories, and this year’s delayed holiday effectively eroded just over $800 million in first-quarter sales from these two categories alone.

The good news is that Easter-driven sales didn’t disappear altogether. Historical data indicates that when grocery retailers unwrap their second quarter numbers, they should find a nice surprise.

Price Deflation

Price deflation, or the reduction of general prices in the economy, has eroded the potential benefit of some of the brightest spots across the store. Despite an increase in overall volume in produce and deli, both of these departments saw significant drops in pricing in the first quarter of 2017. If prices would have even held flat with where they were during the same period last year, we would have seen an additional $600 million. When adding in the smaller price deflation in meat and dairy, that number jumps to $700 million, roughly one-fourth of the total decline.

The FMCG downturn hasn’t been isolated in the dairy aisle. Other food categories, like fresh meat and produce, were strong contributors to growth just a year ago. However, due to overall deflationary pressures, the fresh meat and produce categories have been affected by commodity deflation.

Shifting Consumer Preferences

While more than half of the total decline came from Easter and deflation, respectively, consumers’ changing preferences are also affecting growth. Consumers’ growing focus on health and wellness is directing them toward healthier foods from the fresh department; they’re exercising dietary diligence and buying less dairy, especially yogurt and cheese, and instead, swapping them out for other products or shifting to out-of-home channels. Consumers are also swapping center store grocery and frozen foods to produce and deli, buying more fresh and prepared items over the last few years. The $332 million declines in frozen foods account for nearly one-10th of total declines.

Lastly, consumers’ preference for e-commerce is shifting volume, especially in pet, beauty and general merchandise, which are all found in the center store aisles. Instead, categories like pet care are garnering more than 80% of the category’s overall sales growth online.

But despite what might seem like an overly gloomy scenario for the U.S. retail industry at large, there are still opportunities for growth across the store. Because deflation has been so significant, it’s actually masking healthy growth trends, such as the maturing, long-term shift toward fresh foods and consumers’ relentless focus on transparency. Most of the deflationary categories actually align well with healthy eating trends. As prices rebound–and some already are–these short-term headwinds will reverse course.

The good news is that, as of April, many prices have started to rebound in the second quarter. The push toward fresh and deli prepared foods are well aligned with where consumers are, by and large, headed for the foreseeable future. But the real question is how are manufacturers and retailers addressing the more systemic shifts in changing consumer preferences across health and wellness and online channels?

In our next post that dissects the FMCG landscape, we’ll explore the smaller FMCG manufacturers that are capitalizing on health and wellness and premiumization to find growth.

Methodology

Data and insights for this article were derived from Nielsen Answers on Demand and FreshFacts, Total U.S., quarter ended April 1, 2017 vs. year-ago, UPC-coded (fresh categories also includes random weight).