Operating profits at US supermarkets are expected to increase at a “fairly healthy rate” in 2017 after a disappointing 2016, according to a new report from Moody’s Investors Service. The sector’s profitability was adversely affected in 2016 as a result of an unprecedented level of deflation, but, as downward pressure on prices wanes, things are expected to pick up in the latter half of 2017, Moody’s said.
“We expect the US supermarket sector’s operating profits to grow about 8% in 2017, compared with an approximate 5% drop last year,” said Mickey Chadha, an analyst with Moody’s. “As deflation subsides, growth will be skewed toward the second half of the year, driven by improvement at Albertsons, The Kroger Company and Whole Foods Market.”
In 2016, the US Department of Agriculture estimated “food-at-home” prices declined 1.3%, but Moody’s said it now expects prices to rise about 1% in 2017, relieving some of the pressure on supermarkets’ top-line.
According to Moody’s, sales of natural and organic foods, as well private label food products, are expected to continue their steady climb. As more people choose to eat healthier meals at home, the US natural and organic food market is growing in the high single digits annually, Moody’s said. Meanwhile, private label products are finding ways to better compete with name brand competitors through more eye-catching packaging and a larger selection of organic and all-natural product options.
Moody’s said that although on-line food purchases have increased, brick-and-mortar grocers aren’t especially threatened by on-line competitors. Online food purchases accounted for less than 1% of the US retail food market in 2016, Moody’s said, adding that the overall food retail market is expected to grow on average 2% to 3% annually and on-line penetration to be less than 3% of the total food retail market in the next five years.
The rating agency said it does expect further consolidation in the supermarket industry, as regional chains look to extend their geographic reach and unprofitable stores are divested or closed.