The rise of Millennials and the aging of Baby Boomers represent significant challenges for established food brands and traditional grocery stores, according to new study from investment bank Jeffries and business advisory firm AlixPartners.
The study, dubbed “Trouble in Aisle 5” (alluding to grocery center-store), included a survey of 2,000 adult grocery shoppers, conducted in May.
Over the next decade, Millennials (born between 1982 and 2001) will come of age and Boomers (born between 1946 and 1964) will enter the next phase of their lives and spending patterns. As a result, established food brands and traditional grocery stores will be pressured at both ends by consumers with different value equations.
Millennials over 25 will make up roughly 19% of the U.S. population by 2020, up from just over 5% in 2010. The median income for the 64 million Millennial households will increase to more than $45,000 from just over $28,000, and their food-at-home spending will jump by $50 billion annually through 2020.
Boomers, who have been driving consumer trends for decades, will fall to below 20% of the population over the next eight years. They will also be moving out of their peak-earning years into retirement. By 2016, they’ll be more reliant on fixed incomes and focused on lifestyle preservation. Their at-home food spending could fall by as much as $15 billion per year through 2020.
The at-home food industry is just starting to feel the impact of these new dynamics.
Millennials: Low Loyalty; Convenience King
The study found that Millennials have strikingly different attitudes toward consumption than their Boomer parents and grandparents, which will put great pressure on the traditional model of homogeneous brands provided by traditional grocery retailers.
“Food makers and traditional grocery retailers need to start making changes now to address the emerging needs of this demographic group,” stresses Scott Mushkin, managing director and senior equity research analyst covering food and drug retailing and packaged food at Jefferies.
Key Millennial characteristics:
*Convenience is king. Millennials “expect to get what they want, when and where they want it, and they know they have options for both products and retailers,” says Mushkin.
*Much less loyal to food brands than older generations. Under half (47%) of Millennials surveyed stated that brands are “extremely” or “somewhat” important in grocery purchasing decisions, compared to 61% of Boomers.
*Much more willing to use alternate shopping methods, like online and smartphone shopping and delivery services, and to cross retail channels, rather than use traditional grocery stores for
Just 41% of Millennials’ total food spending is at traditional grocers, compared to 50% of Boomers’ total food spending. Millennials’ greater propensity to buy everyday items from mass merchants, specialty retailers, club stores and online retailers means growing opportunities for these channels, but major challenges for traditional grocers.
*More price-sensitive than Boomers. Among Millennials earning less than $20,000 per year, price is far and away the most important factor in purchase decisions, with 75% at this income level citing price as “extremely important.” As income rises, attributes such as product quality, healthy and natural/organic increase in importance. Also, Millennials require a smaller discount to purchase private-label products.
*More willing to pay more for the specific attributes that they value: convenience, freshness, health, variety (of flavors, international/ethnic cuisines, product sizes, etc.) and natural/organic. 58% of Millennials expressed willingness to pay more for natural/organic products, compared to 43% of Boomers.
Boomers: Decreased Spending Power, Changing Priorities
Boomers will maintain significant influence in traditional center-store supermarket purchases, and food makers and grocers will have to adjust to meet this cohort’s changing needs and preferences.
Boomers generally are more loyal to brands and retailers, and remain committed to shopping at their local grocery stores -- armed with coupons. With incomes decreasing and retirement funds and home values under siege, even the wealthiest Boomers are being conservative about spending.
Boomers also view their food choices as a means of remaining healthy and extending longevity. Taste, freshness and quality will continue to be important, as will products addressing health/wellness and specific dietary needs tied to aging.
Key Strategies: Fresh and Healthy
The changes will demand a “relentless focus on the consumer” for established food manufacturers and retailers, but also present potential for rapid growth for new concepts and products, says David Garfield, managing director at AlixPartners and head of the firm’s Consumer Products Practice.
Food companies will be under greater pressure to deliver more for less: fresher, higher-quality product, more choices and more convenience. They’ll need to be more nimble, with more innovative product development, leaner supply chains and more effective use of marketing initiatives, say the researchers.
Given that “fresh and healthy” are high priorities for both Millennials and Boomers, offering more such choices is strategically critical for both food makers and traditional grocers.
For these retailers, the good news is that despite the younger generation’s greater use of other retail channels for buying everyday essentials, more than 80% of those surveyed continue to shop traditional grocery stores for fresh products. Also, Millennials’ shopping habits aren’t necessarily locked in yet.
The researchers stress the need for traditional grocers to employ better segmentation; focus on perishables; reduce center-store space but also innovate to better engage customers and improve sales in that area; and expand private-label choices (particularly fresh, natural, organic and better-for-you items).
The survey was conducted among 2,000 grocery shoppers over age 18 (1,000 shoppers across age ranges, plus 500 Millennials age 18 to 31 and 500 Boomers age 48 to 66).