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Supermarkets Go Specialty
By Denise Purcell
The adage that the middle always gets squeezed is playing out in today's hypercompetitive food retail landscape. Discount supercenters and upscale merchants are crowding conventional supermarkets' territory with value pricing on one end and luxury, quality and service on the other.
In retailing, the last place you want to be is in the middle," commented Rod Hawkes, a professor at the Cornell University Food Industry Management Program, in a recent seminar, "Supermarkets Go Specialty: How to Stay Competitive," held at NASFT's Super Retailer Summit II in Napa, Calif. "What do you stand for? You are undifferentiated on price, assortment or quality."
To create their own point of distinction, traditional grocers are eying a specialty niche. Though supermarkets currently account for the majority of U.S. specialty food sales-71.8 percent, according to Specialty Food Magazine's State of the Specialty Food Industry 2006-many companies desire a higher profile in the specialty sector. Some supermarkets are expanding in-store selections of prepared foods, higher-quality perishables, organics and service counters, whereas others are operating exclusively upscale smaller-format locations.
"There is no longer a ‘one format fits all' kind of supermarket," says Michael Sansolo, senior vice president of the Food Marketing Institute in its study, Facts About Store Development 2005. Among the 77 companies representing 4,208 stores surveyed, there is a strong interest in developing niche-focused stores to broaden market share. Among retailers trying this avenue, gourmet/specialty foods ranked as the most embraced format, offered by 66.7 percent of companies, followed by natural/organic (50 percent) and ethnic (25 percent).
Wal-Mart Goes Organic
Supermarkets are the sales leader in food sales, comprising $457 billion annually. But their market share is declining as discount and other mass-market formats multiply. "Supermarkets have struggled to stay viable, but are losing to supercenters," explains Nick McCoy, senior consultant of Retail Forward, a Columbus, Ohio-based retail market tracker.
Megamerchants have become a dominant force in grocery. Wal-Mart alone operates 1,866 supercenters with grocery departments-and that number could triple by 2010. Minneapolis' Target Corp. plans to incorporate larger grocery sections into most of its 1,239 stores.
"Supermarkets can compete by focusing on an area that Wal-Mart has traditionally not been so good at," says McCoy, who anticipates an influx of smaller stores with an upscale or fresh-foods focus. Ethnic niches will also prosper in certain communities, such as Lakeland, Fla.'s Publix Super Markets' two-unit Hispanic-format Publix Sabor.
Wal-Mart, however, has launched two new endeavors with decidedly upscale themes, both anticipated to shift the retail playing field. In March, the company revealed that it will double organic produce and dairy selections, beginning in its Texas stores. It also opened a 217,000-square-foot behemoth in Plano, Tex., that features a sushi bar, specialty foods and a wine department with bottles ranging up to $500.
Taking Aim at Whole Foods
Realizing they cannot compete on pricing, supermarkets are metamorphosing with specialty items offered at a competitive price point. The move takes a cue from-and aim at-upscale players like Whole Foods Markets, which is emerging as a major competitor. With 177 stores, Austin, Tex.-headquartered Whole Foods is the fastest-growing food retailer in the country. It is credited by many industry analysts for redefining what a grocery store is, with an emphasis on fresher items, larger produce selections, more natural and organic choices, expansive prepared foods and an enjoyable shopping experience.
Supermarkets are emulating the successful formula in their own formats at a fast clip. "Whole Foods is growing like crazy but it is not saturating the country. Supermarkets are saying there is plenty of this market out there," notes McCoy.
The nation's leading supermarket chains are all growing upscale niches. Minneapolis' SuperValu-poised to become the second largest traditional grocer in the U.S. with its recent $17.4-billion acquisition of Albertsons, Inc., which included 11-store California specialty retailer Bristol Farms-is emphasizing specialty at its bigg's division. A new bigg's, opened in Cincinnati's Hyde Park Plaza last June, uses new retailing approaches, dedicating about 30 percent of floor space to organic, natural and specialty foods. The store has a wine steward, 750 varieties of produce and an Awakenings coffee shop, Cincinnati's equivalent to Starbucks. The concept will be rolled out into the other ten bigg's within the next three years.
The Safeway Lifestyle
Pleasanton, Calif.-based Safeway, the nation's third largest supermarket chain, emphasizes prepared foods and perishables at its Lifestyle stores. The Lifestyle format-set to comprise one-quarter of Safeway's 1,775 U.S. stores by the end of 2006-differs from traditional Safeways with sushi stations, soup carts, larger delis and meat-carving counters as well as expanded wine departments and more organic products. Yet the model is deliberately flexible to allow individual stores to tailor offerings to their trading area.
Lifestyle stores remain Safeway supermarkets, points out Teena Massingill, manager of corporate public affairs. "We're branding a better shopping experience, but price hasn't changed the way the word ‘upscale' suggests. Lifestyle stores can compete with Whole Foods on one end and supercenters on the other because of Safeway's buying power."
The chain opened 21 new Lifestyle stores and completed 293 remodels to the upscale format in 2005; the latest is a 50,000-square-foot downtown Chicago market that is part of its Dominick's subsidiary. Seven additional Lifestyle locations will reportedly open in metropolitan Chicago by spring.
Atmosphere has as much do with the appeal of supermarkets' updated or niche stores as product selection. Lifestyle stores boast wooden floors while Arthur's Fresh Market, a two-location upscale division of Indianapolis, Ind.'s Marsh Supermarkets, Inc., uses soft lighting to highlight upscale displays.
Shifting Shopping Patterns
The rise of non-traditional formats for food shopping has increased supermarkets' urgency to distinguish themselves. Food is for sale practically everywhere, from the Internet to convenience, drug, dollar and bookstores. Supermarkets must offer consumers a compelling reason to shop there, stresses McCoy.
According to ACNielsen data, the average consumer made 69 trips to the grocery store in 2004, down from 72 trips the year before. "Consumers pay one-stop shopping lip service," says Laurie Demerrit of the Hartman Group, a Bellevue, Wash., consulting firm. "But we see an increase in the number of places they shop."
Today's shoppers look for alternate sources for different occasions. If they are hosting a dinner party, they may go to an upscale store to buy high-quality meat and appetizers, then travel to a supercenter to make up some of the cost difference with bargains on mainstream items. "Perishables are a category where consumers will go upscale," Demerrit continues. "Supermarkets are concentrating on perimeter items, especially fresh foods that resonate health and wellness."
Clemens' Tiered Approach
Taking heed of these split shopping behaviors, several grocers are positioning themselves with diverse brands to provide a variety of experiences. Sixty-six-year-old grocer Clemens Family Markets unveiled its upscale Foodsource by Clemens concept six years ago (see Profile, March 2006 Specialty Food Magazine). The three-unit specialty store operates in the company's established base of southeastern Pennsylvania and Delaware.
Foodsource is part of a three-tiered business strategy to reach lower-, middle- and upper-income brackets, explains Mark Clemens, director of community marketing. Clemens Family Markets encompasses 20 traditional grocery stores in addition to its two-store Sav-A-Lot division and Foodsource.
The divisions are separate but
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