Independent Supermarkets Stay Afloat and Ready for Challenges

For independent supermarkets, financial results in 2022 will not be the same as in 2020 and 2021, which were positive years despite year-over-year declines. However, grocers are up for the challenge despite inflation, rising business expenses, declining volume and units, and prolonged market volatility.

This is according to the 2022 edition of the Independent Grocers Financial Survey, a joint study between the National Grocers Association (NGA) and FMS Solutions, which documented a complex 2021 where the only constant was change.

In an unprecedented turnout, 374 independent grocers representing nearly 2,000 supermarkets shared their financial and operational data for the fiscal year 2021, which runs through March 31, 2022.

“While down from the incredible spikes in 2020, independent grocers’ knowledge of the marketplace, grit and nimbleness resulted in the second-best year on record in terms of net profits before taxes,” said Robert Graybill, president and CEO of FMS Solutions.

According to the study, grocery retailing remained in flux throughout 2021. Consumer spending and trips shifted between online and in-person, closely related to the number of new COVID-19 cases.

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Inflation and out-of-stocks caused shoppers to shift items, sizes, brands, and stores, with value-focused formats gaining strongly in 2021.

Supply chain challenges kept independent retailers on their toes with historically low order fill rates compounded by labor shortages, a complex regulatory environment, and going up against the most significant year in grocery retailing. 

In this challenging market, the study notes, retailers focused on implementing loyalty programs to optimize trips and spending as reliance on the paper circular is dwindling.

“Supply chain challenges kept independent retailers on their toes with historically low order fill rates averaging 74.6%,” Graybill said.

Despite a 6.5% inflationary boost, 58% of independent supermarkets could not match their 2020 sales records, although many came close. Same-store sales were down 1.7%, meaning that while dollars remained well above 2019’s pre-pandemic normal, gains were entirely driven by inflation.

On the other hand, the store core accounted for nearly 61% of sales as consumers continue to focus on kitchen staples and value. Varying inflation levels also influenced departmental contributions to sales, as did out-of-stocks. Total out-of-stocks increased slightly to 3%, but inventory turnover remained high due to low replenishment rates.

Inventory management, inflation, and demand caused independent supermarkets to reduce margins in key departments in 2021, including meat and produce. Total store margin fell to 27.4%, down one percentage point from 2020. Expenses increased to 28.7% of sales, back to 2019 levels, with labor and benefits averaging 15% of sales. Many retailers also experienced increases in utilities.

Analysis of the Independent Grocers Financial Survey indicates that each year, one group of retailers outperforms the rest of the sector by a wide margin. This group, which ranks in the 25th percentile of independent supermarkets in terms of pre-tax net profits, is known as the profit leaders.

An examination of their characteristics shows a consistent focus on efficiency and effectiveness. With an average pre-tax net profit of 10.1%, this group improved its 2020 performance with a focus on fresh, particularly produce and deli, higher margins, above-average transactions, and bigger baskets.

Operationally, profit leaders are focused on controlling losses and reinvesting in their businesses. These are essential lessons for 2022 amid significant pressure on the grocery dollar amid high inflation and record fuel prices.

“For many years, independent supermarkets have proven to be resilient, creative, and nimble,” said Greg Ferrara, CEO of the National Grocers Association. “Strongly rooted in their communities, independents are well positioned to weather the perfect storm of the supply chain, inflation, and labor challenges.”