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Food & Beverage AnalysisExecutive Insights
Capitalizing on Opportunities in Fresh Prepared Foods
With the increased focus on investing in the perimeter of the grocery store, fresh prepared foods is one of the most interesting growth areas for U.S. grocers. The lines of retail and foodservice have been blurring as grocers realize there is a golden opportunity to capitalize on consumers’ desire for fresh prepared foods and drive foot traffic.
This Executive Insights profiles the high-growth category of fresh prepared foods and why retailers and suppliers alike can expect to find significant opportunities in this market for years to come.
Capitalizing on Opportunities in Fresh Prepared Foods was prepared by Rob Wilson, Jon Weber and Dan McKone, Managing Directors at L.E.K. Consulting. Rob is based in Chicago and Jon and Dan are based in Boston.
For more information, contact consumerproducts@lek.com.
How is passenger behavior evolving?
Food & Beverage AnalysisExecutive Insights
Unlike their international counterparts, most U.S. grocers are still learning how to meet consumers’ desire for fresh prepared foods.
For example, ask any consumer who’s been to London recently: The fresh prepared to-go offerings there are far superior to what can be found in the U.S. Consumers in the U.K. can grab premium wraps, ready-to-eat ethnic meals with interesting flavor profiles, delicious salads and a large variety of other offerings. While there are some good offerings in the U.S., they are limited and inconsistent. The race is on to increase quality at a national scale.
The $34 billion fresh prepared foods market has been experiencing accelerating growth and grew 10% last year, with strong growth expected to continue into the future.
U.S. grocers: increased focus on high-quality fresh prepared foods
Total U.S. fresh prepared foods market – grocery channel
(2011-21F)
Source: L.E.K. analysis
Capitalizing on Opportunities in Fresh Prepared Foods 2
Billi
ons
of d
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rs (R
SP)
~$25B ~$26B~$27B
~$29B~$31B
~$34B
~$38B
~$41B
~$45B
~$48B~$51B
2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F
~7% ~7% ~8% ~10% ~10% ~11% ~9% ~8% ~7% ~6%
CAGR2011-16
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~8%
Yoygrowth
52
0
8
4
12
20
16
24
32
28
40
36
48
44
Forecast
Food & Beverage AnalysisExecutive Insights
Fresh prepared foods comprises five mega-categories
Capitalizing on Opportunities in Fresh Prepared Foods
Prepared meals & center plate
Ready to eat value-added meals Fresh sliced vegetables Bread (artisan loaves, focaccia, etc.)
Chilled and hot bar soups Chilled sauces
Ready to cook value-added protein
Fresh sliced fruit Desserts (in-store bakery) Chilled dips Leafy salad bar
Rotisserie chicken Decorated sheet cakes Other sauces, dips, condiments, etc.
Fresh prepared produce In-store bakery Sides Other
Nonspecialty (nonleafy) deli salads
Ready to eat (nonleafy) specialty salads
3
Food & Beverage AnalysisExecutive Insights
Which trends are contributing to strong growth in the U.S.?
Capitalizing on Opportunities in Fresh Prepared Foods 4
Consumers
Health and wellness Consumers are increasingly focused on reading ingredients and searching for clean label and organic/natural products
Convenience needs “On the go” eating and snacking has become increasingly popular as consumer sentiment as it relates to snacking has dramatically improved since the 1990s
Eating away from home In April 2015, foodservice spend away from home surpassed spend on food at home and has been outpacing retail growth since 2010
Shopping in store perimeter Household grocery trips to purchase fresh foods have increased 1.0% YoY vs. a 1.3% decline in overall grocery trips
Grocers
Farm-to-table local sourcing In the search for healthier food, specialty and locally sourced “food with a story” suppliers are making inroads against and driving disruption in big CPG
Private label growth Private label penetration is believed to be ~45-55% of the overall ready-to-eat value-added meals market as retailers can promote “made in-house”
Foodservice “in-store” Increased desire for ready-to-eat (RTE) options as consumers look for “an experience” in their grocery trips
Nascent supply base Regional producers (e.g., commissaries) still supply the bulk of fresh prepared foods; food safety remains a concern, with variability in quality and consistency across national chains
Food & Beverage AnalysisExecutive Insights
Although “best in class” fresh prepared foods retailers like Whole Foods and Costco lead the way with strong penetration rates, the overall U.S. market averages just roughly 4%.
Conventional retailers have been pushing to catch up to higher penetration rates. More progressive retailers like Trader Joe’s and H-E-B have fresh prepared penetration rates around two times the national average, but there is a large segment of grocers that has not yet capitalized on this growth opportunity.
Most retailers are underpenetrated in fresh prepared foods
Fresh prepared dollar sales as percentage of total grocery sales (2016)
Capitalizing on Opportunities in Fresh Prepared Foods
Source: L.E.K. interviews and analysis
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Excess pricingUnnecessary costs – in excess of international norms
Excess utilization Average THC ofother rich nations
0
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Indicators of fads/fad risk
Examples:
Description:
Product
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Products that are part of a trend solve a customer need, while fad products are often purchased based on irrational purchase criteria, including perceived scarcity, future resale value, etc.
Product adaptability allows products to respond to market needs and desires, allowing them to maintain an attractive value proposition.
Customer segment
Niche market appeal
Fad products may initially appear to be applicable to a large population, but the product value is strong only for a small population subset.
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Demandfluctuation/
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Industries propelled by celebrity endorsement or media hype are often short-lived, as demand is not based on a fundamental need.
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Capacity: 27.1 GW (37%)Northeast
Con: 40.7 GWh (18%)Cap: 23.9 GW (32%)
Center-Westand Southeast
Con: 129.0 GWh (56%)Cap: 15.4 GW (21%)
SouthCon: 36.7 h GWh (16%)
Cap: 7.2 GW (10%)
BrazilC: 232.2 GWh (100%)A: 73.6 GW (100%)
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Economic recession
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Growing threat of substitutes
Volatile commodity / input prices
Affordable Care Act
Regulatory and legislative pressures
Macro-economic headwinds
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Cost of employee healthcare and other benefits
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Most common barriers to growth over the next three years (prompted) 2017 Percent of respondents(N=230)
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their business being impacted by the
recession is >15%
~70% of the respondents today believe some degree of threat is posed by
prepared foods in retail
16
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Level of threat posed by prepared foods in retail (2017) Percent of respondents (N=230)
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1
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Small threat
Moderate threat
Strong threat
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333
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Asia Middle East Europe Latin America North America AfricaOceaniaAsia
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2B+
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$250B+ monetization opportunity for the global transport industry
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5
Food & Beverage AnalysisExecutive Insights
The lines of retail and foodservice have been blurring in the perimeters of stores as consumers seek fresh foods that are grab-and-go or require little preparation at home. By developing the perimeter of the store, there is a golden opportunity to capitalize on consumers’ desire for fresh prepared foods and drive food traffic for U.S. grocers compared with international counterparts.
Fresh prepared foods expected to continue stealing shelf space
Average shelf space per store by temperature state
(2012-21F)
Capitalizing on Opportunities in Fresh Prepared Foods
Source: L.E.K. interviews and analysis
Fresh / fresh prepared / refrigerated (incl. produce, dairy, etc.
Shelf-stable
Frozen
Directional
Perc
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f sq
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2012 2016 2021F
10-15 10-15 10-15
55-6550-55
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40
20
0
6
Food & Beverage AnalysisExecutive Insights
Retailers struggle with consistency in a patchwork supply network
Capitalizing on Opportunities in Fresh Prepared Foods
National
Less common
Regional
Most common
Local/in-store
More common
7
• Typically refrigerated, shelf stable or shipped frozen
• Served by companies with national distribution
• More branded products relative to other fresh prepared foods
• Made regionally/locally
• Often produced by a patchwork of locally based commissaries
• Perceived by consumers to be fresher and of higher quality
• Varied tastes and preferences by region
• In-store value-added foods (e.g., cooked in-store, premium to-go offerings)
• Typically fresh/extremely perishable products
• Seasonal / rotating flavors
Decreasing shelf life
Food & Beverage AnalysisExecutive Insights
Rapid growth with continued upside opportunities
Capitalizing on Opportunities in Fresh Prepared Foods
The U.S. has nascent fresh prepared product offerings compared with the U.K. as retailers are largely underpenetrated
The lines between retail and foodservice have been blurring as consumers demand “made in store” experiences, thus supply chains overlap
There is a current lack of scale in fresh prepared food quality and consistency because the current network is largely a patchwork of commissaries
The opportunity that lies ahead for grocers and suppliers alike is massive, yet many are unaware of it
How will you capitalize on this opportunity?
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Food & Beverage AnalysisExecutive Insights
About L.E.K. Consulting
L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and rigorous analysis to help business leaders achieve practical results with real impact. We are uncompromising in our approach to helping clients consistently make better decisions, deliver improved business performance and create greater shareholder returns. The firm advises and supports global companies that are leaders in their industries — including the largest private and public sector organizations, private equity firms and emerging entrepreneurial businesses. Founded more than 30 years ago, L.E.K. employs more than 1,200 professionals across the Americas, Asia-Pacific and Europe. For more information, go to www.lek.com.
L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respective owners. © 2017 L.E.K. Consulting LLC
About the AuthorsRob Wilson is a Managing Director and Partner in L.E.K. Consulting’s Chicago office. He specializes in the Consumer Products & Retail sector, with a more specific focus in the Food & Beverage practice. Rob advises clients on a range of critical strategic business issues, including growth strategy, pricing
and trade spend optimization, mergers and acquisitions, profitability enhancement, and organizational transformation.
Jon Weber is a Managing Director and Partner in L.E.K.’s Boston office. He leads L.E.K.’s Retail and Consumer Products practices and is a member of L.E.K.’s Americas Regional Management Committee. Jon has been with L.E.K. since 2000 and has extensive experience working across retail channels and
with worldwide consumer brands.
Dan McKone is a Managing Director and Partner, and a member of L.E.K.’s Global Leadership Team. Dan co-leads Edge Strategy® services at L.E.K. and is the co-author of Edge Strategy: A New Mindset for Profitable Growth, a book published by Harvard Business Review Press. He also leads the firm’s Customer
Experience and Loyalty service line.
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