Food Fight: Battle for Millennials’ Dinner Table Reshapes Grocery & Restaurant Scene

kindroots2By Leslie Yevak

A food fight has erupted between giant grocers, meal delivery services and local organic markets as each tries to carve out a bigger slice of America’s changing eating habits. It’s a high-stakes battle, especially as food prices tumble and millennials reshape dining in the next decade.

For companies like Kroger Co. and Whole Foods Market, Inc., the shifting tastes demand big changes, such as adding online ordering and curbside grocery pickup. Lexington’s family-owned food stores and cafés are competing by promoting their Shenandoah Valley flavor with locally-sourced fresh ingredients. Some are even selling their own meal kits to compete with the invasion of Blue Apron, Hello Fresh and other front door meal delivery services.

In small markets like Lexington, millennial college students, who make up nearly half of the city’s 7,000 residents, are accelerating this trend.

Millennials “are more conscious about where our food comes from,” said Jonathan Cummings, owner of Kind Roots Café, an all-natural, locally-sourced eatery, which is moving to downtown Lexington early next year. He attributed much of this food shift to improved knowledge about nutrition. “The more we know, the less we are going to eat the way we used to.”

The U.S. grocery industry reeled in more than $600 billion in revenue in 2015, up roughly 2 percent from the previous year, according to Seeking Alpha research.

Several factors are helping and hurting grocers. According to Bloomberg, U.S. food prices have fallen for nine straight months, the longest streak in more than 50 years, with the exception of the financial crisis in 2009.

Analysts say low grain and oil prices are forcing food prices to plummet with them, according to Bloomberg. Consumers are eating more meals at home, which boosts sales at markets, but the prolonged price cuts hurt their profits.

In early December, Kroger reported a 5.9 percent increase in total sales for the third quarter, compared to the same quarter last year. But profits plunged 8.6 percent to $391 million, from the same period last year.

The Cincinnati-based supermarket giant said sales could have been higher if fuel prices stopped falling. Nearly half of Kroger’s 2,800 stores have attached gas stations, which made up almost 14 percent of the company’s revenue in 2015.

These issues are reflected in its stock price. Kroger’s stock price has declined approximately 14 percent in 2016.

The commoditization of all-natural, organic products is taking a big hit on Whole Foods as it implements promotions and discounts to match competitors’ prices in hopes of bringing back its once loyal customers.

Wal-Mart’s stock price has remained relatively steady in 2016 and is creeping up slowly as the year closes. But according to Seeking Alpha research, the retail superstore is struggling to maintain both a strong online and physical presence, and ultimately doubling its costs without making up for it in sales increases.

Even with consistently higher e-commerce sales, Wal-Mart’s total revenue dropped 9.5 percent between its second and third quarter this year, “an indication of possible e-commerce cannibalization of in-store sales,” said Jay Wei, a Seeking Alpha analyst. For the third quarter the retailer’s sales increased only 0.7 percent to $118.18 billion from the prior-year period.

Another big force hitting grocers: Millennials, who could force big grocery chains to keep their prices low, as this generation enters the workforce, and starts feeding families.

When asked to describe their grocery shopping style in a single word, 34 percent of millennials said “thrifty,” according to a survey conducted by Retale, a location-based mobile platform that connects retailers with shoppers. Thirty-eight percent said availability of locally grown or organic products would most likely influence where they bought their groceries.

Kroger’s Simple Truth and Simple Truth Organic brands are the grocer’s response to millennials’ shifting tastes. These private-label brands have had double-digit sales growth every year since they hit the shelves in 2011.

Both brands offer natural and organic foods including dairy, meat, pasta and snacks. Kroger ensures these products are free from 101 artificial preservatives that its own customers told the supermarket they do not want to consume.

Simple Truth sales in Lexington’s Kroger make up just over 30 percent of the store’s total natural foods sales, said Susan Terry, natural foods sales manager for the Mid-Atlantic Kroger Division. This number is higher relative to other Kroger locations because Lexington does not offer a natural foods department within the store.

Terry said based on data gathered for the Mid-Atlantic Division, several college towns share a high percentage of Kroger customers shopping for “naturally essential” foods, meaning they purchase only natural and organic products. Along with Lexington, these towns include Blacksburg, Va. and Morgantown, W.Va., home to Virginia Tech and West Virginia University, respectively.

In 2015, other store-brand sales on the national level echoed Kroger’s success with Simple Truth brand sales, when store-brand sales across the United States increased 2 percent. Name-brand sales increased just as much in 2015, according to the Private Label Manufacturing Association. Total annual sales for store-brands reached an all-time record high at $118.4 billion.

But even local Lexington markets have joined the healthy food movement and tapped into new eating trends, some almost quicker than giant grocers like Kroger and Wal-Mart.

Amenie Hopkins, chef and manager of Blue Phoenix Café, an all-vegetarian restaurant in Lexington, said she serves “clean food” to encourage good health in her community.

“It kind of comes back to taking care of each other. This is food that I would serve my family at home,” Hopkins said. “I’m not going to open a restaurant and serve a bunch of stuff that I wouldn’t eat personally, or I wouldn’t feed our kid.”

Cummings’ menu at Kind Roots Café includes locally-sourced ingredients that come from within 100 miles of Lexington, many of which are organic or all-natural. These products include coffees, cheeses, beef, chicken, vegetables and micro-greens.

“I like clean food. I like food that hasn’t travelled a lot of miles,” Cummings said. “Food where I can look the people [who made it] in the face. The feed was in their hands, and they dropped it on the ground.”

Kind Roots’ upcoming move to Main Street will feature a new café setting, to give it more of a restaurant vs. market atmosphere. Swings will hang from the ceiling and customers will be able to sit at a bar and look out on Main Street, Cummings said. The Café will start serving dinner too, with beer and wine, but will still include its many all-natural, organic ingredients.

According to The Wall Street Journal, food distributors like Sysco Corp. and US Food Holdings Corp. had lower margins last quarter due to food deflation. And with the dining focus shifting to local, all-natural products, big farmers and distributors are facing even tougher losses.

“We’re finding that some of the larger producers are feeling the pressure,” said Rebecca Norris Adams, co-owner and manager of Lexington’s only farm-to-table restaurant, The Red Hen. “I think they’re stepping up their game, but it’s still a lot of stuff that’s engineered to travel, instead of engineered to be picked that day and served that day.”

The Red Hen sources almost all of its ingredients from farmers and purveyors in the Shenandoah Valley, including Cedar Hill Farm, Buffalo Creek Beef, Cheese to You and Homestead Creamery. The small family farms know the ins and outs of working the Valley’s land, and pass the tricks down generation to generation, Adams said.

“It’s the story of the Shenandoah Valley, the food of the Shenandoah Valley,” she said. “The heart of local food is in this Valley because it is so productive, specifically for small family farms.”

But aside from the food itself, Lexington even offers services that restaurants and customers cannot get just anywhere.

“One thing we really love about this area is the meat. Both local meat and a local butcher is just amazing,” Adams said. “That’s really hard to come by.”

But even with the benefit of locally-sourced food products, some small, organic markets in Lexington still cannot compete against bigger companies like Kroger.

Earlier this year Healthy Foods Co-Op, one of two healthy food grocers in Lexington at the time, closed its doors and then reopened as Blue Phoenix Café. But the café now offers more prepared food and fewer organic and all-natural products on the shelf.

Just one month ago, Cool Spring Organic Market in Rockbridge County announced suddenly on Facebook that it plans to close on Dec. 15. This leaves Lexington and the County without any health food grocer options.

But Cummings said he hopes the healthy food scene in Lexington will grow. Buying locally-sourced ingredients and products puts money back into the community, and that is really important, he said.

Millennials’ shifting tastes are joined by new demands for convenient access to food. In 2016 Kroger added its ClickList curbside pickup service to 21 stores in Virginia. The program allows customers to place their orders online or in the Kroger app, and four hours later pick up their groceries at their local market without stepping foot inside the store.

According to a Dec. 8 Kroger news release, once a customer arrives at Kroger the process takes roughly five minutes.

But with just a little extra charge, front door meal delivery services offer even more convenience. Companies like Blue Apron and Hello Fresh are gaining a place at the table via delivery meal kits, packed with fresh, premeasured ingredients and instructions on how to cook dinners that can feed up to six people.

Blue Apron offers sustainably-sourced seafood and seasonal produce, and includes only the necessary amount of ingredients in its meal kits. According to its website, the delivery service sources ingredients directly from its suppliers to reduce food waste in customers’ refrigerators and on supermarket shelves.

Red Hen at Home is a spin-off of the Blue Apron philosophy, and offers meal kits containing locally-sourced ingredients at Washington Street Purveyors, on East Washington Street. Adams said the restaurant intends to offer a similar service, without delivery but with ingredients unique to the Valley.

“That was the idea,” she said, “to have the same convenience and freshness [as Blue Apron], but have it sourced locally, more locally than what they’re doing.”

But the future in delivery and curbside pickup for many grocers and local markets is looking dim, as the Amazon Effect picks up speed in the food industry.

On Dec. 5 Amazon announced plans to open Amazon Go in 2017, a grocery store in Seattle that will use the Amazon app to automatically detect what food products customers put in their shopping carts, and then charge their Amazon Prime account when they exit the store.

Stock prices for Kroger, Target, and Wal-Mart all dropped that day upon fears that the grab-and-go experience will steal impatient shoppers from their own brick-and-mortar stores.

But according to Seeking Alpha research, despite online sales growth for grocery products, these sales only make up a little more than 1 percent of total grocery sales. So the e-commerce giant strategically strayed from its successful online platform to bring its loyal customers to a physical store.

“At the same time that Amazon is chipping away at moving consumer non-perishable grocery spending online, it’s turning its attention to capturing the 50 percent of grocery spending that’s a heavier and harder lift to move online: perishables,” said a Seeking Alpha analyst report. “But rather than forcing a change in how consumers shop for their meat, produce and dairy products, Amazon has opted to give them a different physical store experience.”

The cashier-less and checkout-less grocery store tops Blue Apron’s attempt at satisfying customers’ need for convenience. Now shoppers can still pick out their own products, but avoid crowded stores with long lines at the register.

Analysts predict Amazon Go will disrupt existing brick-and-mortar grocery retailers, and is even on its way to reinventing the entire retail industry. And if the Seattle store mirrors any of the e-commerce giant’s earlier successes, it looks like Amazon could be eating those grocery stores for lunch.

But in downtown Lexington, some local markets do not fear the Amazon Effect will take over their business, at least for now. Cummings pins Kind Roots’ success on students, hopes their loyalty extends to his new location on Main Street.

“Thank you students, you guys are the best,” he said. “You help keep us in business, you really do.”