In the US, middle-class families have not seen a sustained rise in median household real income over the past three decades. The stagnation has not been reversed in recent years despite very low unemployment rates. Median real household income in 2005 was $55K and $56.5K in 2015. However average household expenditures on healthcare, including premiums and deductibles, increased from 5% of income in 2005 to 10% in 2015.  Net of healthcare expenditures median family income actually fell in the last decade.

The pressure on middle-class incomes led to cut backs on branded items in favor of private label products. The share of private label goods increased from 15.3% of sales in 2005 to 17.7% in 2016 . Major retailers have been responsive to the trend. Kroger’s five-year old Simple Truth brand now covers 1,400 products with $2B in sales. Albertsons has four private label brands each with over $1B in sales.

Discount store formats with a limited assortment of products prominently featuring private label offerings have also gained share. Aldi, with 2,400 private label SKUs per store  on average now operates +1,600 stores in the US, up from  800 in 2005.  Costco with 670 warehouse stores and +$30B in food sales has effectively lowered price per pound for its patrons.  It has using its buying power to require manufacturers to sell in very large packages in addition to offering its Kirkland private label brand.

Pricing pressures have compressed operating profit margins at branded food manufacturers. They have responded by cutting-back on less-certain new product development, outsourcing corporate functions such as payables and receivables processing, and moving from higher-cost manufacturing locations (unions and/or urban centers). Even more dramatic moves have been made to promote operating efficiency and management focus.  Spin-offs are increasingly the norm. The separation of Kraft Foods in 2012 into the Mondelez snack business and the Kraft branded staples business is a case in point. Since 2012, Kraft laid off approximately 3,000 corporate staff worldwide, and in late 2017 announced it planned to close seven North American plants resulting in 2,600 job losses. Mondelez in 2016 announced it was moving a significant portion of its cookie production from Chicago to Mexico, accompanied by a loss of 600 union jobs.

While I would like to be an optimist (despite having majored in the “Dismal Science” of Economics), the headwinds against income improvement are likely to weigh against real income gains.  One of the forces at work is changing societal norms. Households are now more likely to consist of one adult/one-earner. In 1970, 70% of households consisted of married couples, falling to 48% in 2015. In 2015. the median household income for a married-couple household was $84.6K versus $40K for non-married households.  Additionally, US government redistribution of income using tax policy and subsidies has shifted away from wage earners (typically less affluent households) to favor owners of wealth.

The US food retailing industry is consolidating in anticipation of continued pressures on revenues and earnings. In the US the top three retailers (Walmart, Kroger, and Alberstons) now command 27% of the grocery market.  Progressively larger retailer organizations will have even greater resources to develop, and deploy across a large footprint of stores, improved private label products.  Further US consolidation raises the prospect of converging to the “UK pattern” where the top three retailers (Tesco, Sainsbury and Asda) collectively have a 60% grocery market share and +40% of products are private label. Private label is so pervasive in the UK there can be two or even three different store brands at multiple price points in a given category.

Another near-term pressure on food retailers in the US is expected to come from Amazon’s $14B acquisition of Whole Foods. The two platforms combined – Amazon and Whole Foods – represent only 1.5% of US grocery sales. While this figure is dwarfed by Walmart’s 15% share, industry observers are concerned Amazon will lower prices and forego near term profits at Whole Foods, driving down prices industry-wide for organic foods (branded and private label) as well as other premium brands.

In the longer term – the next five to ten years – traditional grocery retailers will face new infrastructure costs and complexity as they compete with Amazon/Whole Foods’ offering increased convenience from online sales delivered via mail, pick-ups of on-line orders at Whole Foods’ stores, and home delivery.

To my colleagues in the food industry – I welcome your thoughts and insights into the challenges and opportunities ahead of us – particularly your insights on how Amazon/Whole Foods will shape the landscape. Please direct comments to [email protected].

Sources: US Census Bureau, current population survey; Commonwealth Fund study, October 2016; Bureau of Labor Statistics; Nielsen; Private Label Manufacturers Association; Piketty, T., Capital in The Twenty-First Century, 2014; The Belknap Press of Harvard University Press); Annual reports from Aldi, Costco; Mondelez and Kraft press releases and related articles.

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