The Economist June 4th 2 022 31
United StatesFood retailers
The not-so-super market
A
mericans havelong been proud of
their supermarkets. The first grocer
with food in aisles, to be picked up by
shoppers rather than kept behind a coun-
ter, opened in Memphis, Tennessee, in
- In Bentonville, the hometown of Wal-
mart in north-west Arkansas, Americans
flock to a bombastic museum celebrating
the firm’s founder, Sam Walton, and his
commitment to “bringing low prices to
underserved rural communities”.
Today Americans spend a smaller share
of their income on food to be cooked at
home—about 6%—than people in almost
any other rich country. Low prices are re-
flected in low profit margins. At Kroger,
America’s second-biggest supermarket
chain, the net margin, after taxes, is about
1.2%; at Walmart, the biggest, it is 2.3%.
Yet Americans are finding themselves
served less and less well by their super-
markets. Food prices have risen by 11% over
the past year, which is sharply more than
in other rich economies. As customers
change their shopping habits in response,
that in turn is shaking up the grocery busi-
ness. A fall in the share prices of big super-
market firms last month, as several report-
ed they had overestimated demand and
stocked too much, hints at the effect.
Even before the current bout of infla-
tion, food prices in America had been ris-
ing faster than most other prices for the
previous 20 years. A study in 2017 by the
un’s Food and Agriculture Organisation
found that the cost of eating healthily in
America was 65% more than in Britain, and
among the highest in the rich world (see
chart). The inflation figures suggest that
this will, if anything, have worsened since.
Though Americans still spend a smaller
proportion of their income on supermar-ket food than Europeans, the gap has been
narrowing. In absolute terms they spend
more, even though they also eat out more,
and eat less healthy, cheaper foodstuffs.
Why are American consumers not get-
ting a better deal? A transatlantic compari-
son is revealing. Walmart, which accounts
for about 26% of the American market, has
a gross margin (its profit before fixed costs
like rent and labour are taken into account)
of about 25%. For Tesco, Britain’s largest
chain, which has 27% of its home market,
the equivalent figure is 8%. Since the two
firms both have low net margins (overall
profitability), this suggests that Walmart
has higher fixed costs, and has to charge a
big mark-up. American retail is “high cost,
high touch”, says Simeon Gutman of Mor-
gan Stanley, a bank: customer experience
is prioritised over price.
Walmart’s shops are enormous, selling
plenty besides groceries. Tesco operates
over 4,000 shops, the bulk of which are its
smallest. Walmart has only 4,700 shops in
total, despite serving a population about
five times larger. On average, its supermar-
kets are ten times larger by floor space than
Tesco’s. Bigger stores increase consumer
choice. A Walmart supercentre might stock
140,000 different items, compared with
just 40,000 at Tesco’s biggest branches. But
it also means they may be wasting a lot of
space by stocking products that do not sell,
adding to costs. American supermarkets
sell far less per square foot of shop space
than British supermarkets, notes Bryan
Roberts, a consultant based in London.BENTONVILLE, ARKANSAS
Why grocery shopping in America is ripe for a shake-up
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