Here's why supermarkets are in for a more profitable year

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Here's why supermarkets are in for a more profitable year

03/23/2017

Last year, supermarket profitability was crimped by an unprecedented level of deflation for an economy not in recession. But in 2017, things will pick up, especially toward the latter part of the year, according to Moody's.

"We expect the U.S. supermarket sector's operating profits to grow about 8% in 2017, compared with an approximate 5% drop last year," said Moody's analyst Mickey Chadha. "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."

Contrary to last year, when the FDA estimated that "food-at-home" prices declined 1.3%, Moody's expects prices to rise about 1% in 2017, relieving some of the pressure on supermarkets' top line. Operating profit declined about 5% in 2016 and was below the rating agency's expectations as the predominantly fixed cost structure of the sector exacerbated the negative impact of deflation.

Sales of natural and organic foods, as well private-label food products, will keep rising, Moody's says. With more people opting to eat healthier meals at home, the U.S. natural and organic food market is growing in the high single digits annually. Meanwhile, private-label products are vying with their name-brand counterparts with splashier packaging and a growing number of organic and all-natural options, at prices on average 23% cheaper than national brands.

And unlike other sectors of the U.S. retail market, brick-and-mortar grocers aren't especially threatened by online competitors. Online food purchases have gained in popularity, but still accounted for less than 1% of the U.S. retail food market in 2016.

Moody's expects the overall food retail market to grow on average 2%-3% annually and online penetration to be less than 3% of the total food retail market in the next 5 years. Nevertheless, the rating agency does expect further consolidation in an over-stored industry, as regional chains look to extend their geographic reach and unprofitable stores are divested or closed.