Industry Description

The grocery industry (SIC 5411, NAICS 7445110) consists of retail locations selling food products.  There are almost 65,000 grocery and supermarket locations across the U.S., according to Census data.[1]  U.S. supermarkets and grocery stores generate annual revenues of approximately $491 billion.[2]

A typical grocery store is about 46,000 square feet in size and carries approximately 39,000 different products.[3]  Over 73% of sales come from groceries and other food for off-premise consumption.  Drugs, health and beauty products account for an additional 10%, followed by alcohol (3%), paper and related products (2%), soaps and cleaning products (2%) and other products (9%).[1]   Of the sales of grocery and food items, the majority consist of meat, fish, poultry and delicatessen items.[4]

The grocery store industry is generally a high volume/low margin type of business, which makes effective supply chain management very important to keep costs low. On average, grocery store profit margins are around 2%.[4]  Larger grocery chain stores can take advantage of buying products in bulk to reduce costs and these savings can be passed down to the consumers without a sacrifice in the profit margins.

In recent years, the format of grocery stores has changed significantly.  Grocery retailers fall into one of several categories based on their size and market strategy:

  1. Traditional supermarkets offer a full line of groceries, meat and produce;
  2. Superstores are at least 30,000 square feet and offer an expanded selection of non-food items;
  3. Fresh format or “natural” grocers emphasize fresh produce and offer an assortment of ethnic, natural and organic foods;
  4. Warehouse or wholesale stores concentrate on price appeal and may sell food in bulk;
  5. Supercenters are hybrids of supermarkets and mass merchandisers that sell a wide variety of non-food items.[3]

The supermarket industry is moderately concentrated; it is estimated that the four largest companies account for approximately 38% of all revenue.[2] According to Supermarket News, the top 10 grocery store companies operating in North America are:[5]

  1. Wal-Mart
  2. The Kroger Co.
  3. Costco Wholesale Group
  4. Target Corp.
  5. Safeway Inc.
  6. Supervalu, Inc.
  7. Loblaw Co.
  8. Publix Super Markets, Inc.
  9. Ahold USA, Inc.
  10. C&S Wholesale Grocers

Some of these stores, such as Walmart, Target, and Costco, have a substantial portion of revenues from non-grocery sales.

Industry Trends

Trends in the grocery industry have changed over the past several years, especially in response to shifting consumer lifestyles. A few of the most significant changes are:

  1. Independent retailers are renting space in supermarkets
    Many grocery stores are now renting out spaces to independent retailers such as coffee providers (e.g. Starbucks and Coffee Bean) and banks. Adding these service providers is beneficial to the grocery stores because it attracts customers and encourages them to spend more time in the store.
  2. Grocery stores add self-checkout
    A popular trend with many grocery stores has been to add self-checkout lanes. This provides an easy and efficient way to get customers quickly in and out the door with shorter lines and less wait time.  Self-checkout lines can also help minimize labor costs and increase profit.  Walmart intends to install an additional 10,000 self-service kiosks in 2013.[6]  In some cases, however, supermarkets have not seen the customer adoption they expected. Albertsons and Big Y groceries have both begun removing their self-checkout lines.[6]
  3. Supermarkets are expanding their service offerings
    Another trend that has developed over the past several years is the addition of specialty departments and services to grocery stores. Many grocery stores are now offering movie rentals, dry cleaning, photo service, take-out, and even tables and chairs for in-store dining.  Just like supermarket outlets of independent retailers, these expanded offerings provide added value to customers by concentrating a variety of services in one place while encouraging customers to spend more time shopping.
  4. Private label food and drug sales increase
    Supermarkets often sell a variety of products under a private label store brand, typically for a lower price than the brand name version.  During the last several years sales of store brands have increased as shoppers look to stretch their budgets. Over the last year, over-the-counter drug sales, in particular, have taken off.  During 2012, dollar sales of private label medications and pain remedies grew at 8%.[7]

Key Performance Metrics

The following are performance metrics that managers in the grocery business use to benchmark their performance against others in the industry:

  1. Sales per square foot
  2. Sales per employee
  3. Sales per customer transaction
  4. Number of items carried
  5. Inventory turnover

Industry Organizations and Publications

Some organizations that publish helpful information about grocery stores and supermarkets include:

  1. National Grocers Association:, an association of independent retail and wholesale grocers
  2. Grocery Manufacturers Association:, an association of food, beverage and consumer products companies
  3. Food Marketing Institute:, an “organization serving the needs of food distribution and related business, including grocery wholesalers and retail supermarkets”[8]

Summary of Valuation Approaches

There are four different types of valuation methods that can be used to value grocery companies, as follows:

  1. Asset-based valuation: This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities.  This approach is also sometimes referred to as a “cost based approach”; that is, the business’s value is equal to the cost of acquiring its physical assets. This approach is seldom used for a grocery store being valued as a going concern because the value of a grocery store is more closely related to its earnings and cash flow.
  1. Income approach to value (capitalization of earnings): This method is most applicable to stores that face predictable and constant growth in earnings and have a long history of operations.  The business value under this method is equal to the cash flow projection for one year d