by Treva Bennett/staff writer
Competition is alive and well in the Arizona grocery industry, and it looks to become even more so in the future. With a strong economy and growing population, Arizona—one of the hardest-hit states during the recession—is becoming more attractive to national retailers, according to Tim McCabe, president of the Arizona Food Marketing Alliance (AFMA), in an interview with The Shelby Report.
“The economy is very healthy,” McCabe said. “Unemployment has dropped from 5.5 percent to 4.7 percent. The overall job growth is up significantly; it’s rebounded very well.”
He said Arizona and Nevada took some of the biggest hits in terms of housing prices during the recession, but they have recovered.
Arizona continues to post solid growth in jobs and income, according to George W. Hammond, Ph.D., director and research professor of the University of Arizona’s Economic Business and Research Center. In his report, “Arizona’s Third Quarter 2018 Economic Outlook Update,” published Sept. 1, Hammond reported the Phoenix area “remains the engine of state job gains, but Tucson is contributing as well. All major industries in Arizona added jobs during the past year, with construction employment finally firing on all cylinders. Housing permits are up but not enough to restrain rapid house price increases. Overall, the state housing market is not yet in the red zone, but housing affordability will become more of a concern in the near future.”
Hammond reported that, in the long run, “Arizona remains well positioned to outpace the nation and most states in job, income and population growth…The state’s standard of living will continue to rise, even after accounting for inflation.”
As the economy has improved over the past few years, businesses are feeling more confident about improvements and expansion.
“What we’re seeing now is more of our retailers are not only putting more money into remodeling their stores, but they’re also building new stores,” McCabe said. “That’s a very good sign.”
Fry’s, Safeway and Sprouts were among those building new stores, he said, with Bashas’ undertaking some remodels.
In 2018 in Arizona, Bashas’ remodeled two Food City stores in Tucson and Phoenix, a Bashas’ in Gilbert and a Bashas’ Dine store in Tuba City, along with an AJ’s store in Phoenix. According to a company spokesperson, a new Bashas’ Diné Store is projected to open in February, and a Bashas’ Store in Whiteriver has been remodeled, with a grand reopening planned for Jan. 9.
A new presence coming into the state is Aldi, with plans for a distribution center on the west side of Phoenix in the Goodyear area and the opening of seven or eight stores, McCabe said.
In response to an inquiry from The Shelby Report, Aldi issued the following statement: “Aldi has more than 1,800 stores in 35 states and is one of the fastest-growing retailers in the U.S. The company is charting an aggressive course to reach 2,500 stores by the end of 2022 and is currently exploring opportunities in Arizona as well as several other markets. At this time, we don’t have specific information about expansion areas or potential store locations, but we look forward to sharing news as plans are solidified.”
The growth in Arizona in the grocery and convenience store categories is primarily driven by chains, which McCabe classifies as retailers with 10 or more stores.
“We have one of the smallest percentages of independent retailers of any state,” he said. “Arizona as a state is very chain-driven. Approximately 93 percent of retail sales is driven by chains.”
Arizona’s economy and demographics are causing national retailers to look at the state for the future.
“Overall land prices here are affordable compared to other states, so it’s a good place to be long-term. But as a result of that, it’s very competitive right now,” McCabe said.
Following the trends
Arizona is following the nation as far as many trends go. McCabe said the biggest trend appears to be toward healthy, nutritious food. Another national trend seen in Arizona is the increasing popularity of delivery of product, whether by store pickup or home delivery. And while liquor by delivery already was available, it is growing in popularity and is something AFMA is looking at addressing during the upcoming session of the Arizona State Legislature.
“We’re in the process right now of working some legislation out that would help us address the prevention of selling to underage (consumers) when you order and deliver liquor,” McCabe said.
Age verification is “one of the challenges with the coming of online ordering,” he continued. “You have to have a very detailed age verification system set up when you’re doing that vs. how we’ve been doing it forever in the brick-and-mortar stores.”
Another state and national trend is meal kits, where the grocery store provides all the ingredients and “all customers have to do is take them home and cook them up. It’s simple to do,” McCabe said.
A trend that no retailer wants to see continuing is that of property theft, McCabe said, adding that criminals now are more blatant about their crimes.
“Organized retail crime theft is involved in most retail stores, and that includes convenience stores,” he said. “…That’s a challenge for us to stay on top of that situation.”
He said another aspect of that is criminals putting “skimmers” on fuel pumps to obtain credit card information when a customer is getting fuel.
“That’s a trend that’s unfortunately picking up,” he said. “I think the retailers are doing a pretty good job staying on top of it. It’s a trend that’s not just in Arizona but is going on nationally.”
Issues to watch in the new legislative session
The Arizona State Legislature convened Jan. 14 and will be in session for 100 days. In addition to the liquor delivery legislation, McCabe noted other issues of interest to the industry.
One is a push to raise the age requirement for tobacco purchase from 18 to 21.
“We have two cities in Arizona—Cottonwood and Douglas—that have raised the age to 21,” he said. “We believe the age on tobacco sales, similar to alcohol sales, should be dealt with on a federal level and not city by city because it just creates a lot of confusion. All purchasers have to do is go outside the city limits and purchase their tobacco, so it’s really not beneficial unless you have a consistent policy throughout the entire state or throughout the entire country.”
AFMA also is seeking a reduction in commercial property taxes from 18 percent to 15 percent.
McCabe said 18 percent “is a little on the high side for property tax for commercial, and we’d like to get that reduced. It promotes growth, obviously, for businesses, and anything we can do to promote business growth in Arizona is very important.”
Probably one of the biggest local issues Arizona encountered was the concern of adding special taxes onto junk food or sugar beverages, he said.
“We passed a bill in the legislature last year that says that any of the cities can have a food/beverage tax, but they have to have it consistently on all food and beverage products,” McCabe said. “In other words, you can’t have a special tax on certain products unless you have that same tax on all food and beverage products. We’re not taking away the cities’ ability to tax food, but what we are saying is whatever you do tax, it has to be consistent. If they want to raise their tax or change it, they have to be able to do it consistently across all products.”
On the national level, he said AFMA is keeping a close eye on “what’s going on with NAFTA (North American Free Trade Agreement), how the whole thing is going to shake out. That obviously has an impact on cost of goods—you’re seeing that now in such things as aluminum and steel. Aluminum has a big impact on the beverage business, so you see prices go up there.”
McCabe said prices are very volatile, adding that they are going up in a lot of commodity products, driven by trade agreements.
“It makes it difficult sometimes to pass those cost-of-goods increases on to the consumer,” he said.
Competition to heat up
Arizona is considered one of the most competitive grocery markets in the country in terms of prices, which is a win-win for the consumer, McCabe said. He said competition will increase with Aldi coming into the market, and with the continued growth of online ordering of products with Amazon and Whole Foods, that competition will continue to get stronger and stronger.
“I will say, though, about 25 years ago we had the same issues when Walmart started building supercenters,” he said. “There was a great concern of how that would affect all the other grocery stores and, obviously, it did have an impact on all the grocery stores, but it made competition even stronger. As a result of that most of the retailers, especially the chains, have gotten stronger.”
He said 25 years later, several of the retailers are stronger and still doing well. They adapted and found ways to grow, he said. “I think it’s the same thing; they’re going to find ways to deal with the Amazon/Whole Foods issue so the competition grows stronger in a state that’s already considered one of the most competitive.”
One reason for that is the fact that Arizona is overstored, McCabe said.
“We have more grocery stores than we really need,” he said. “A lot of stores were built 10-plus years ago, before the recession, and although the economy’s come back fairly strong, it hasn’t come back to the levels of what was anticipated. We’ve got a lot of stores, we’ve got a lot of competition.”
While Amazon has had a big impact on retail in general, its purchase of Whole Foods and the increasing popularity of online ordering for groceries has been felt industrywide. However, Arizona’s grocers seem to be holding their own.
“Our food retailers are ahead of the curve,” McCabe said. “Most of them have already started delivery, whether it’s order and pickup or their own deliveries. They’re starting a lot of their own delivery programs with their own apps, and they’ve been very competitive with this. They feel it’s making the industry more competitive but, overall, the food retailers have adapted to that.”
McCabe said he thinks the future challenge with online delivery is how fast consumers will change when it comes to fresh products such as produce, meat and bakery, “where they’ve been acclimated to squeezing their own tomatoes or looking at their own meat. For the ability to just order that online, we’re not sure of that. I’m sure there’ll be some solutions in the future, but right now the retailers are doing a lot of experimenting.”
He said the center store of larger grocery stores in the future will look totally different than it does today. What that look will be is hard to say right now, McCabe said, but it will be something that will bring the consumer in, making sure that the trip to the grocery store is a total experience. He also expects customer service to improve, as that is something people continue to demand.
“There will be a lot of experimenting,” he said. “The question really will be how will a lot of these fresh items, with a short shelf life, adapt (to online ordering) and how are you going to deliver fresh, refrigerated products to states like Arizona in the summertime when the outside temperature is 110 degrees?”
Having served as AFMA president for the past 10 years, McCabe said one of the things he is proud of is the organization’s ability to successfully promote the importance of the retail food industry in Arizona not just to the consumer but to those in government—local or state—and regulators.
“We’ve been able to promote not only the importance but the significance of our industry and what we represent,” he said. “We basically do the food and the fuel. When you compare to several other industries, you quickly realize how important our industry is to the overall success of people in their daily lives and in their jobs or anything when it comes to selling food or fuel. I think we’ve been pretty successful at elevating that awareness.”
McCabe said AFMA has built some strong partnerships over the years with all of its points of contact, whether through members and suppliers, regulators or any type of government agency it has worked with.
“For us, it’s all about being a partner and it’s all about having a seat at the table so when there are any decisions made that could impact our industry that we have the ability to have input,” he said. “I think we’ve been successful with that.”
He said AFMA also has done a good job of advancing education opportunities for those in the industry.
“We’ve given away over $1 million in scholarships for folks in our industry, and we’ve partnered with some of the universities to further advance our industry in terms of having specific courses that are related to our industry to try to bring more and more people and future leaders in,” McCabe said. “Those are a few of the things I think that we’ve been able to accomplish and make good progress on in the last several years.”
In partnership with Arizona State University (ASU), AFMA launched the Food Industry Management (FIM) degree program. AFMA has a diverse board of directors, McCabe said, with members representing food retail, media, growers and education, among others. One of those board members works for ASU.
“We believe in farm to fork,” he said. “We’re all in this together from the time you start producing products to ultimately our stores, where the consumers purchase the products. So we kind of work in tandem with everybody to make sure that the whole food network is successful. Working with ASU, we came to a mutual agreement that there needs to be some things in the education process, in the college process, of advancing your education to get more specific into our industry. We represent well over 100,000 employees just in the state of Arizona, so our industry’s very significant. We also want to promote the fact that there’s a lot of good jobs in our industry.”
McCabe said there’s a perception that food retail is not a glamorous industry, and students don’t realize it has so much potential.
“You can become a president of a company in our industry if you’re willing to put in the hard work and commit yourself. The opportunities are endless, and there’s some very, very good jobs and very good careers in our industry,” he said. “People don’t think about it; the youth don’t think about coming out of school and getting into our industry.”
Part of the purpose of the degree program was to grow awareness, McCabe said, adding that ASU was gracious enough to add several advanced courses specific to the industry.
“You can get a degree in business and you can major in Food Industry Management, so when you come out of college you’ve already had five or six courses that can be everything from accounting to supply chain to the understanding of commodities, things that are very relative to our industry,” he said. “We’ve had some very good success with the program, and our foundation has helped support it by making a $100,000 contribution over a five-year period for scholarships for this program to entice students to get into it. It’s just one of many that we work with ASU to try to grow the level of awareness and to really get some of the future leaders of our industry involved in these types of educational programs.”
Graduates of the program can look not only to food retail for careers but also to suppliers.
“Whether you’re with Coca-Cola or Frito-Lay or Shamrock Farms—those are great career opportunities as well, and we represent that industry,” McCabe said. “We’ve had some success doing this, but we’re looking for the future presidents and senior leaders in our industry, and by partnering with universities like Arizona State, we think that we’re well on our way to help find those folks.”
As for McCabe, he announced his retirement from AFMA at its board meeting in October. He has agreed to help find his successor and currently is engaged in that pursuit. After finding the right candidate, he will stay on for a transitional period before finally retiring.
When he gets to retire, McCabe said he plans to do several things he’s always wanted to do but never had the time for.