Introduction: Food Waste Is an Enormous Problem

In the US, an enormous amount of food goes to waste. The grocery sector accounted for more than $232 billion of food waste in 2020, or more than $1,660 per household, based on US government data. Looking at it another way, grocers generate 10.5 million tons of surplus food annually, of which nearly 35% is sent to landfills or incinerated.

Grocery is well known as an industry with razor-thin margins—the largest grocers have net margins of around 2%—and can hardly afford such an enormous hit to its margins. Best-in-class shrink figures (most grocers classify food waste under shrink) run slightly above 2%, so any efficiency improvement would offer a dramatic improvement to profitability.

Grocery food waste carries a variety of financial and environmental costs. At the grocer, food waste must be identified, collected for disposal and transported to landfills, which requires labor and generates carbon emissions. Once in landfill, food and its packaging both emit greenhouse gases and other chemicals. These costs are incurred through traditional brick-and-mortar grocery; e-commerce also impacts the environment via transportation, packaging and waste generation. Moreover, consumers and legislators are increasingly putting pressure on grocers and retailers to improve sustainability and manage waste, such as requiring composting or sorting, which presents additional costs to grocers in waste disposal.

Perishables make up nearly 11% of sales but account for more than 80% of shrink. This has a significant impact on grocers’ bottom lines, since gross margins for produce, meat, deli and bakery fall within the range of 30%–55%, compared to just 25% for dry grocery. In addition, food safety, traceability and freshness are even more critical and labor intensive to manage in this category.        

Amid this waste and inefficiency, people are hungry in the US and around the world. Around 10.5% of US households experienced some type of food insecurity in 2020, according to a study by the US Department of Agriculture. On a global basis, the $1 trillion worth of food that is lost or wasted annually could feed the number of undernourished people globally twice over, according to the United Nations’ World Food Program USA.

Dispelling Five Myths About Food Waste in Grocery

Coresight Research interviewed several large grocers, and each used a variety of terms to represent food waste. Most account for it as “shrink,” which also typically accounts for waste and inventory that has been lost to breakage, counting errors or theft. When discussing waste, most grocers focus on food that goes to landfill, although some retailers include food that cannot be sold at full price—such as discounted or donated products.

One confounding issue is that many grocers do not measure and manage food waste directly. While every grocer interviewed was cognizant of the importance of food waste and motivated to improve efficiency, not one had central responsibility for food waste—although many retailers have made “zero waste” pledges. In most cases, food waste represented just one of many efficiency metrics that were managed at the store or regional level.

Grocers also differ in their measurement of food expiration, with some taking measurements more than once per day and others monitoring expiration dates when restocking. This brings to mind a quote attributed to business management thought leader Peter Drucker: “If you can’t measure it, you can’t improve it.” In many cases, labor must be used to manage food waste and data capture, which is increasingly complex and costly as the pandemic continues to evolve and as stores need more labor to fill increased omnichannel demand.

The wider retail industry is continuing to adopt advanced technology, particularly machine learning (ML) and artificial intelligence (AI)-based tools—boosted by the need to adapt to a changing retail environment and meet shifting consumer requirements amid the pandemic. However, grocery largely remains a traditional sector that only conservatively implements new technology even when seeing proof of the return on investment. Much food waste is caused by over-ordering, a distributor shipping too much product or by errors made in the production of prepared food. Simply ordering what was ordered last week or month can result in wide mismatches between supply and demand.

Large enterprise-software vendors and many innovators offer advanced demand-forecasting and inventory-optimization software, much of which uses AI and ML—but these tools are only as good as the historic and on-hand inventory data that is currently quite inaccurate, making automation and accuracy in data capture a top priority. Many retailers are starting to use RFID (radio-frequency identification), robots and inventory-tracking cameras to drive increased inventory accuracy and optimization. Although grocery is a slow adopter, we expect the benefits of advanced technology to drive the business case for increased use in the sector moving forward.

There are many reasons for grocers to throw out food. One software vendor commented that the average grocer has more than 1,600 expired items on the shelf in an average 9,000 items in dry grocery—about 20% of total on-shelf assortment. Other sources of food waste include overproduction and human error in prepared food, stemming from a lack of accurate visibility into inventory quantities and location.

Fortunately, there are many outlets for grocers to share food that is edible but perhaps too close to the “sell by” date, including donation to food pantries, repurposing (for example cooking fresh meat to sell at the deli counter), composting and recycling.

There are also many old and new methods of selling soon-to-expire food, including bundling on a discount shelf (e.g., two for the price of one) or offering daily specials. Several innovators that have developed smartphone apps enable grocers to offer discounts to consumers immediately, much faster than could be done in the Sunday newspaper insert. Some retailers have implemented dynamic pricing through shelf-edge labels and other technologies, adjusting prices downward as food approaches its expiration date.

There are several environmental costs associated with grocery food waste. First, wasted food must be transported to landfills, which requires consuming fossil fuels and generating carbon dioxide. Second, perishable food can generate greenhouse gases—such as methane—in landfills, which contributes to global warming. Its packaging occupies space, is often non-recyclable and can off-gas pollutants as it decomposes. Food waste accounts for 8%–10% of human-caused greenhouse-gas emissions, according to the World Wildlife Fund.

If retailers and other retailers want to take a holistic view of the total impact of food waste, they need to consider these second-order effects as well: They first need to measure and quantify them before they can begin to modify their actions to reduce their environmental impact. Various software vendors are incorporating sustainability into their platforms to measure the impact from farm to consumer.     

While much of food waste can be controlled through better demand forecasting and methods to manage the measurement and expiration of fresh food, there simply is not enough accurate and automated data to maximize efficiency. There is an opportunity for this industry to embrace more technology at a faster rate through partnerships with leaders in food waste forums, private industry and standards bodies.

Once the data has been captured, suppliers can share that data with their grocery customers to better match true demand, rather than just automatically shipping fixed supply quantities on a regular basis. Distributors have a financial incentive to ship greater volumes to collect higher revenues, and some grocers also receive rebates from CPG (consumer packaged goods) vendors for unsold food, which is a source of revenue for them and provides a disincentive for reducing waste. However, some common ground could be achieved, particularly in the role of data for recalls. Greater cooperation across the entire food industry, including data sharing, could make the entire industry more efficient and reduce waste.

Implications for Brands and Retailers

There are several measures that grocers can take to reduce food waste and support efforts toward social responsibility and sustainability goals, as well as driving meaningful impacts on profitability. The first step to solving a problem is understanding and measuring it. Digitalizing products in supply chains down to the item level would enable retailers and software platforms to manage and control all processes within the food-waste journey.

Once the data has been accurately captured, demand forecasting software can better match supply and demand, taking the first step of preventing much overordering and overproduction. Then, dynamic pricing can help retailers sell the remaining edible food so that it does not end up in a landfill, needlessly occupying space and generating greenhouse gases. Collecting and sharing data throughout the entire process enables grocers to better control their operations and achieve the benefits of collaboration with suppliers and partners.

Upcoming Research on Food Waste in Grocery

Our upcoming report will further explore the five myths discussed above. We will analyze findings from a proprietary survey of food retailers to understand how the US grocery sector is reducing food waste, the actions that are generating results, what technologies are seeing high investment and the opportunities for retailers to address food waste moving forward.