how online ordering is shaking up the food business

I’m less and less a fan of the Wall Street Journal as time goes on.  Writers seem to be more interested in filling up the page than providing astute analysis.  But there is an interesting section on “The Future of Food” in today’s edition.

What strikes me:

–the threat to supermarkets isn’t simply the shift of dollars to online vendors.  A disprortionately large portion of supermarket profits come from two sources:  house-brand goods; and impulse purchases from endcaps and, more importantly, the shelves along the checkout line.  Even if the online order goes to the supermarket, the chance of selling for $2 during checkout the soda that’s $.40 as part of a six-pack in the beverage aisle is lost.  Also, at least in these early days, online purchasers choose many more national brand items than house brands

–consumers in general, and online orderers in particular, are increasingly gravitating toward healthier foods.  This means less sugar.  The difficulty for food manufacturers is not only switching sugar for some non-sugar thing that tastes the same.  There’s also the volume that must be replaced and the physical properties of sugar that are lost–like that it makes ice cream soft and bread less prone to mold.  Sugary foods are on the way out, but its not clear that the traditional brands will be able to hang on to all their customers during the transition

–ex Amazon, the food ordering app business is complicated by the fact that customer expectations/behavior can be far different from what, say, a fast food conglomerate or coffee chain expects.  Again, the risk of losing customers during a transition period is there

investment implications

Of course, everything has a price.  So at some point traditional food manufacturers and supermarket chains will be cheap enough that all the potential bad news will be more than baked into the stock price.  But I suspect we’re not at that point yet. The issue is operating leverage.  The arithmetic of distribution company profits is such that a 2% drop in sales can mean a 5% fall in pre-tax income.  If the sales lost carry double the average margin, however, the negative effect on profits will be multiplied by at least twice (most likely more).