SIC 5141
GROCERIES, GENERAL LINE



This category covers establishments primarily engaged in the wholesale distribution of general lines of groceries. Specialty establishments—those involved in such activities as roasting coffee, blending tea, or grinding and packaging spices—are not included in this classification. Wholesalers responsible for the distribution of specific grocery classes are classified under specific wholesale distribution areas such as SIC 5142: Packaged Frozen Foods; SIC 5143: Dairy Products, Except Dried or Canned; and SIC 5145: Confectionery.

NAICS Code(s)

422410 (General Line Grocery Wholesalers)

Industry Snapshot

Wholesale food distributors provide food and related products (health and beauty aids, cleaning products, and other general grocery items) to retail grocery stores, convenience stores, and other retailers that sell food products. Food distributors can provide other services to their retail customers as well—advertising, merchandising, accounting, real estate site location, and financing. Their infrastructure usually includes warehouse facilities, truck fleets, and related information technology systems. According to the U.S. Census Bureau's Statistical Abstract of the United States, wholesale grocers generated revenues of $402.9 billion in 2001, compared to $274.8 billion in 1992 and $344.4 billion in 1998. There were 39,700 wholesale grocers in 2000, down from 40,600 in 1999.

The U.S. wholesale food distribution industry reflects the ups and downs of the retail food industry, which was subject to slow or even negative growth during the late 1980s and 1990s. Historic low levels of food inflation, weak consumer spending, and the rapidly changing face of the retail grocery industry (including the growth of so-called "wholesale club" stores and the decreasing influence of the independent grocer) have all taken their toll on the retail and wholesale food industries.

Retail grocers—and the wholesalers that depend upon them—have also seen a growing portion of their sales being taken away by restaurants. In the 1990s, restaurants emphasized value and convenience to lure new customers, and an increasingly time-stressed public has responded in increasing numbers by eating out or buying takeout food. In 1955 consumers spent approximately 25 percent of their food money at restaurants. By the turn of the century, in a single day an average of 4 out of every 10 people frequented eating establishments, and the total portion of the American food dollar spent eating out had grown to 45 percent. To counter this trend, as early as the mid-1980s, a number of retail grocers began offering prepared food. They began with salad bars and soon were offering sandwiches, microwaveable dinners, pizza, and soups. In 2002 over 80 percent of supermarkets offered some sort of prepared foods, and providing a selection of prepared foods was listed among the top 10 trends, according to the Progress Grocer.

Another factor contributing to the decline of the food wholesaler was the trend toward self-distribution. Grocery chains are increasingly moving in this direction, causing wholesalers to expand their client base in order to take on more (and often smaller) independent grocers. With the number of independents shrinking annually, this pool was becoming limited, forcing some wholesalers to look to mergers as their only way of surviving.

Organization and Structure

To be profitable, wholesale distribution must operate on a local or regional level. The most successful distributors, therefore, have either located their warehouse near a targeted metropolitan area or have set up a system of branch warehouses to limit the distance their truck fleets must travel to deliver goods to retailers.

As of 2003, there was a variety of wholesale distributors in the United States. The specialty wholesaler provides a limited range of products—gourmet foods, spices, candy, or greeting cards. These wholesalers usually provide a range of services that include point-of-sale merchandising material, display suggestions, and product servicing such as stock rotation and monitoring of product displays. Rack jobbers provide a limited line of products—usually health and beauty aids, house wares, toys, and other types of non-food merchandise with distinctive marketing requirements different from those needed for food items—for which they assume complete responsibility on the in-store level.

Full-service wholesalers offer complete lines of grocery and non-grocery products; they also often provide lines of general merchandise, dairy, bakery, frozen foods, fresh meat, and fresh produce. Besides the food products themselves, full-service wholesalers provide help to the retailer in advertising, merchandising, and procuring products they may not warehouse. For example, a wholesaler may not actually stock fresh meat in its own warehouse, yet it may help retailers in obtaining and marketing fresh meat products. Among the range of merchandising services a full-service wholesaler may provide its retail customers are retail accounting, site selection, store design and interior layout, personnel training, display, promotion, advertising, suggested retail selling prices, and advisory help in projecting and controlling sales, gross margin, expenses, and net profit. In some instances, a full-service wholesaler may make private or controlled brands available to its retail customers.

The retailer-owned wholesaler reflects the efforts of a number of retailers to join forces (sometimes under a common name) to operate their own warehouses and shipping lines. The cooperative effort makes it possible for retailers to obtain merchandise at the lowest possible cost. In addition to providing lines of food products, the retailer-owned wholesaler also supplies group advertising, merchandising, and other services. Among the largest retailer-owned wholesalers are the Wakefern Food Corporation of New Jersey and Certified Grocers of California, Ltd.

Background and Development

In the early history of American food merchandising, retailing, wholesaling, and importing were often carried out by the same organization. It was not until the 1850s that the three activities began to distinguish themselves. Between 1850 and 1900 specialized wholesaling became common as service wholesalers provided a complete line of grocery products, including non-food items and perishables, to independent retail food stores.

During the early twentieth century, the number of service wholesalers grew rapidly. As chain stores developed and flourished, beginning with the founding of the Great Atlantic & Pacific Tea Company in 1912, wholesalers and retailers formed voluntary and retailer-owned groups. As supermarkets flourished between 1930 and 1965, marketing strategies on the retail and the wholesale level began to evolve, and major changes in food distribution took place. Retailer-owned and voluntary group wholesalers grew in number; at the same time, food wholesalers began to streamline and automate their distribution processes to cut costs and boost efficiency.

Among the earliest wholesaling leaders were the Independent Grocers Alliance (IGA Stores), founded in 1926, and Nation-Wide Stores, founded in 1928. These early wholesalers saw themselves as having two roles, stocking retailers' shelves and serving as merchandising experts to help increase profits.

Intense competition marked the 1970s and 1980s. The high inflation rates of the 1970s, coupled with the energy crisis, contributed to a general downturn in the industry. The industry profile was also in flux during this period because of changes in the retail food industry. Small retailers began expansion into multiple stores, sometimes also increasing their geographical dispersion. As chains spread out, the costs of moving goods to them from warehouses increased; some of the multiple-store owners turned to new distributors closer to their branch stores, while others began their own warehouse operations. The 1980s saw the consolidation of many food chains and the subsequent closing of warehouses that proved to be redundant.

Current Conditions

According to Progressive Grocer, wholesalers continue to serve as the primary supply source for more than 15,000 supermarkets. Ninety-eight percent of independents (those with fewer than 11 stores) and 18 percent of chain supermarkets depend on wholesalers to stock their shelves. In total, wholesalers provide goods for nearly one-third of the national supermarket sales.

However, the trend toward self-distribution, which began in the 1980s, continues to be one of the most serious threats facing the wholesale grocery industry. Wholesalers have historically made their biggest profits from servicing small regional independents, many of which were non-unionized and therefore able to save in labor costs. As the small independents consolidated into regional chains, the few remaining independents lost their labor cost advantage, since the chains gained labor concessions from their unions.

The strength of regional chains allowed them to negotiate price concessions from wholesalers and reduce their use of the supplementary services for which the wholesalers previously charged. Many of the remaining small independents were unable to compete against new formats such as combination stores and wholesale clubs. Consequently, competition for the wholesalers increased as did margin pressure, and wholesalers have had to deal with the growing clout of surviving customers and the threat of self-distribution.

With the move to self-distribution, wholesalers must either acquire new accounts or take over other wholesalers to maintain sales volume. As of 2003, the bulk of wholesaler business is derived from small-volume independents and relatively small chains. Regional chains and such nontraditional food retailers as "deep discount" drug stores and "club" stores have forced wholesalers to invest more heavily in the weaker companies they supply to maintain their volume.

The largest wholesalers—most notably Supervalu and Fleming Companies, Inc.—have responded to these pressures not only by acquiring other wholesalers but also by significantly increasing their presence on the retail side of the grocery industry. By 1998, Fleming derived 31 percent of its revenue from retail operations. Supervalu, meanwhile, had reached as high as sixteenth place among U.S. food retailers in 1998. Essentially, these wholesalers were creating their own self-distributing chains through their acquisitions of retail chains and encroaching on retail territory, just as retailers have been encroaching on wholesaler turf. However, poor sales prompted Fleming to announce its withdrawal from retail operations in 2002, and the company placed up for sale its 110-store retail division, operating under the banners Food 4 Less and Rainbow Foods. Unable to stabilize its books, the company filed for Chapter 11 bankruptcy in April 2003.

Another major source of competition for the industry is the proliferation of alternative format stores, including warehouse clubs, deep discount drugstores, mass merchandisers, and supercenters. Analysts expected these alternatives to capture a greater market share from traditional retail outlets as alternative outlets offer more food and food-related products. By 2002 Wal-Mart had become the nation's largest grocer, holding a 12 percent market share. Other discounters, including Costco and Target, were gaining ground in the grocery business.

A new wrinkle in the grocery industry is the online grocer business, which allows people to shop for groceries on the Internet. Touted as the future of grocery shopping, several online wholesale/retailer appeared on the scene, equipped with big investment backing and high expectations. Founded in 1999, Webvan, considered a "pure player" because the company focused specifically on grocery items, delivered nationwide and expected to have distribution centers in 10 U.S. cities by the turn of the century. However, by early 2001, the company was struggling with a cash flow shortage, and in July the Webvan was forced to file Chapter 11 bankruptcy. Others soon followed suit, including another pure player, Homeruns.com. By the early 2000s online grocery shopping was being revisited, but this time online operations were being aligned with existing brick-and-mortar stores, thus creating hybrid "brick-and-click" businesses.

The wholesale food industry has been forced to consolidate to remain profitable. In the past, voluntary wholesalers—firms that derive the majority of their revenues from independent stores operating under voluntary group banners—were the primary source of acquisition and growth for wholesalers. A growing number of other types of small wholesalers are also being acquired by their larger counterparts.

Wholesalers will need to know that the price of services they provide for their independent customers will not be affected by costs related to distribution inefficiencies. They will also need to secure favorable terms from manufacturers and pass along these savings to their customers, thus leveling out price differences among all types of retailers. Cutting down on excess inventory is also seen as a key to future grocery wholesalers' success.

A shrinking client base is one of the major reasons for the high consolidation rate in the wholesale food industry. The fate of the independent supermarket is a good illustration: According to Progressive Grocer, independents accounted for 65 percent of supermarket sales in 1952, 42 percent in 1972, 29 percent in 1992, and 16 percent in 1998. Large chains, convenience stores, and alternative-format stores have all taken market share from independents. Another factor is the capital-intensive nature of the wholesale grocery industry, which requires constant investment in systems, technology, and warehouse enhancements. Smaller wholesalers may have difficulty financing these commitments.

Industry Leaders

The largest food wholesaler in the United States in 2001 was also a food retailer and manufacturer of food products. Supervalu Inc. (formerly known as Super Valu Stores, Inc.), with headquarters in Eden Prairie, Minnesota, reported 2002 revenues of $19.1 billion, resulting in a net income of $257 million. A wholesaler of groceries, drugs, sundries, and toiletries, Supervalu supplied 4,000 stores (down from 4,600 stores in 1998). It also supplied nearly 1,400 self-owned retail grocery stores in 14 states and made peanut butter, nuts, and candies. Supervalu grew rapidly in the late 1990s through acquisitions, for example, signing an acquisition agreement with Richfood, Inc. of Richmond, Virginia, in June 1999 (Richfood, the ninth largest wholesaler, had 1998 sales of $3.01 billion.) As of 2003 Richfood does business as Supervalu, Eastern Region.

The second largest food wholesaler was Fleming Companies Inc., of Oklahoma City, Oklahoma, which had sales of $15.5 billion in 2002, resulting in a net loss of $200 million. After announcing the sale of its 110-store retail operations in 2002, the company did not sufficiently cover its debts and filed for Chapter 11 bankruptcy in April 2003. A publicly held company founded in 1916, Fleming supplied more than 3,100 stores in 46 states and exported food products as well. In the 1990s, Fleming solidified its wholesaling and retailing operations through several acquisitions.

Further Reading

"66th Annual Report of the Grocery Industry." Progressive Grocer, April 1999.

eMarketer Special Issue on Online Grocers, 7 January 2000. Available from http://www.emarketer.com .

"Fleming to Complete Exit from Retail." DSN Retailing Today, 7 October 2002, 8.

Food Marketing Institute. The Food Marketing Industry Speaks, Fiftieth Anniversary, 1999. Available from http://www.fmi.org .

——. "Facts & Figures," 2003. Available from http://www.fmi.org .

Ghitelman, David. "Click-and-Mortars Dig in as Pure-Plays Vanish." Supermarket News, 24 December 2001, 17.

"Top Wholesalers to Supermarkets Ranked." The Food Institute Report, 3 February 2003, 5.

U.S. Census Bureau. Statistical Abstract of the United States: 2002, 2002. Available from http://www.census.gov .



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