Supermarkets feel the squeeze as convenience stores and dollar stores add more groceries to their mix.
By Richard Turcsik
Well, isn’t this convenient?
Just as traditional supermarkets have gotten a handle on threats from supercenters, clubs and limited assortment stores, two more formats are making major incursions on their turf—convenience stores and dollar stores. Sure, both formats have been around for years, but in efforts to diversify and build sales in the recession-scarred economy both are stepping up their assortments of supermarket-style food.
“Dollar stores are becoming mini grocery chains,” says Glenn Llopis, president of Glenn Llopis Group, a performance development and brand management company based in Irvine, Calif. “Right now money is tight and people are willing to channel shop because they know that certain levels of distribution and certain retailers are discounting at levels that mainstream grocery stores are not,” he says.
As a result, dollar stores have been steadily increasing the amount of selling space devoted to grocery. Many sell branded products that have been in test markets, are discontinued or are nearing their expiration date. However, they are increasingly stocking custom-made and private label products.
In February, Matthews, N.C.-based Family Dollar hired Fort Worth, Texas-based Marketing Management, Inc. (MMI) to be its exclusive private label sales and marketing agency. “A compelling assortment of private brand merchandise across the store gives our value-conscious customer more choices and complements the increase in national brand products from food to housewares,” says Don Hamblen, senior vice president of customer marketing at Family Dollar. “Enhancing our private brand offering is a key strategic initiative for Family Dollar aimed at driving improved margins and customer loyalty.”
From cigarettes to Chardonnay
C-stores, meanwhile, are moving beyond cartons of milk and cigarettes to selling Chardonnay, rotisserie chickens and side orders of mac-and-cheese. According to industry experts, in some places c-stores are now targeting the dinner daypart, which they see as their last frontier.
“C-stores have breakfast and lunch figured out, but they still quite haven’t figured out dinner,” says Dr. Richard George, Ph.D., professor of food marketing, Gerald E. Peck fellow, Haub School of Business, at Philadelphia-based St. Joseph’s University. “Once they do, I think c-stores can be a real, real inhibitor to the prepared foods side of the supermarkets’ business.”
“Convenience retailers are continuing to enhance their foodservice programs,” says David Bishop, managing partner at Balvor LLC, a Barrington, Ill.-based sales and marketing consulting firm. “This focus is motivated by higher margins versus packaged goods, competitive differentiation and growth opportunities that align with the consumer needs that convenience stores satisfy relative to immediate consumption,” he says, adding that the ability to stock fresh foods has been largely fueled by improvements to the supply chain.
“Convenience stores are expanding their fresh foods in order to better meet the needs of consumers looking for quick and easy meal solutions on-the-go,” Bishop says.
Numerous operators, including industry leader 7-Eleven, are working to improve their fresh food marketing, says Beth Ann Kaminkow, president and COO of TracyLocke, a brand-to-retail marketing agency based in Dallas and Wilton, Conn. “It varies depending upon region and market, but it appears that the convenience channel is testing everything that you could possibly imagine to see on a menu for almost every single daypart,” she says.
“This will continue to make stores like 7-Eleven a competitive threat to coffee shops, grocery stores and fast-food establishments. Shoppers have shown they are open to making these fresh food purchases at a convenience store.”
The c-store industry took a hit during the recession, but is coming back strong, operating 146,341 locations this year. That’s 1,800 more than in 2010.
“We sell immediate consumption,” says Jeff Lenard, vice president of communications for Alexandria, Va.-based National Association of Convenience Stores (NACS). “In an economic downturn, the more you have to think about a purchase the less likely you are to make one. We take away as many of those roadblocks as possible,” he says. “We are not far away. You don’t have to look at your 401(k) to make a purchase. The lines are short.
Everything is easy. It’s in a lot of stores’ names. That helps in a recession.”
With some observers predicting that gas prices will surpass $4 a gallon this summer, Lenard expects c-stores to place an even greater emphasis on food. “The profit on gas is 2-cents a gallon, so on a fill-up maybe you make a quarter. On a cup of coffee, you can make more,” he says. In 2009, gas was more than two-thirds of the industry’s total sales, but less than one-third of the profit. “Gas literally drives traffic, but you better have something else that drives profits.”
At Swiss Farms, a Broomall, Pa.-based c-store chain of 13 corporate and one franchise location, that “something else” is “drive-thru convenience.”
“Our tagline is ‘America’s Drive-Thru Grocer,’” says Dennis Geraghty, director of marketing. Swiss Farms locations consist of a double drive-through where shoppers pull up and order products from their car. “On the surface, you might think we’re a convenience store, but actually our product mix is aligned with the express line of the supermarket. That’s really our target,” he says. “Rather than having to go through the hassle of parking at the supermarket, dragging the kids in, waiting in line, getting your car dinged and everything else, you just drive in and drive out.”
According to Geraghty, Swiss Farms analyzes syndicated express checkout lane data from wholesalers and other sources to fine-tune its product mix, which currently numbers around 800 SKUs. That’s led to the inclusion of more prepared foods. “In our new stores we have rotisserie chickens set up and we have a relationship with a local gourmet restaurant where we package chilled gourmet meals for dinner under our label,” he says.
It’s a formula that’s apparently paying off. “In spite of the flat retail economy, each year for the last several years we’ve seen compounded real growth on a same-store sales basis,” Geraghty says. “Our shopping experience is like a minute and a half. What is it in a traditional supermarket? Fifteen minutes?” he asks. “It’s never taken me less than that because you have to park and then find what you want. You’re not dealing with 800 items, but 40,000.”
On the other hand, Swiss Farms shoppers place their orders off of a menu and a weekly flyer with specials is distributed to customers. Plus, there is digital signage featuring daypart-specific specials. Next up at Swiss Farms is online ordering, expected to be instituted later this year. “Once we are up and running with shopping online it’s going to be a tremendous boon to our business, not only with additional customers but also with the average number of items ordered,” Geraghty says. “Currently most of our customers’ purchases are planned. They may drive up for milk and then see boxes of Tastykakes in the window, but if you order online you have the full scope of our inventory organized by product category.”
Swiss Farms operates primarily in suburban Philadelphia, opening its first franchise location in Somerdale, N.J. (Camden County) this year. “Last year we implemented a national franchising program,” Geraghty says. “We will be growing concentrically, then regionally so we can control it.”
Balloons and sandwiches
In New Jersey, say “Quick Chek” and a summer hot air balloon fest and mouthwatering sandwiches come to mind. The c-store chain has endeared itself to Garden State residents by being the title sponsor of the Quick Chek New Jersey Festival of Ballooning for more than15 years.
“The Balloon Festival has been recognized as one of North America’s top 100 events to visit by the American Bus Association,” says Jennifer Vespole, senior category manager for foodservice at Whitehouse Station, N.J.-based Quick Chek Corp. “It is also local to our support center, so it feels very much like part of our company. From an advertising and brand development perspective, the amount of impressions we get each year building up to the event is impressive. We are also able to build our brand equity at the event and interact with current and potential customers over the course of three days.”
The company currently operates 116 stores in the Garden State, plus another nine in upstate New York. NACS’ Lenard, who stopped by Quick Chek’s Hillsborough store over Christmas, says he was wowed by the sandwiches as well as the automated checkout system being tested there.
“Quick Chek is very innovative,” says Bill Bishop, chairman of Willard Bishop, LLC, a Barrington, Ill.-based consulting firm. “They have a really nice foodservice program and their sandwich program is excellent. They have a good coffee program too and I’ve never seen a consistent service level at the gas pump as I’ve seen with those guys,” he says. “Even though convenience stores may not be a direct source of competition today, it’s coming.”
Quick Chek continues to evolve, Vespole says. Initially it operated as a mini superette, with expanded grocery, bakery, deli and dairy selections. Today, a dozen stores have pharmacies and 28 sell gas. “Today our deli business supports our fresh-made sub and sandwich program and, though we still bake fresh daily, the bakery also largely supports the sub and sandwich program,” she says. “As people became less interested in preparing their own breakfast and lunch, we moved toward fulfilling that need by offering fresh ground, fresh brewed coffee, fresh made breakfast sandwiches and creating interesting sub, sandwich and salad recipes.
“We have not focused on refrigerated meals for the dinner day part yet,” Vespole adds, “but our made-to-order menu has expanded over the last three years to include chicken tenders, pizza and burgers. We will continue to evolve our menu based on what people feel comfortable purchasing from us.”
That includes single units of immediate consumption produce, such as apples, pears and bananas.
“Some c-stores are looking to have more produce and the thing you see most is bananas,” says NACS’ Lenard. “And probably nobody does that better than Kwik Trip of La Crosse, Wis. I think they are looking to move about 40 million pounds of bananas this year. They have it down to a science. They have banana ripening rooms at headquarters and they are known for their bananas.”
Produce can be a sensitive category, Lenard says. “When you sell great bananas, it says you know what you are doing with food,” he says. “But when you sell bananas that are an hour away from banana bread, it says maybe you have your eye off the ball here.”
Produce is also cropping up in dollar stores.
“It is now becoming a more attractive value proposition for the dollar stores to start offering fresh produce,” says consultant Llopis. “We’ve seen it here at 99-Cent Only Stores in Southern California, where the availability isn’t always consistent but, like the club stores, they are supporting the treasure hunt. People go to these dollar stores just to see what they are offering.”
On his 99-Cent Only Store treasure hunts Llopis has found bags of small apples, along with fresh peppers, onions and bags of spinach. “What’s impressive is that the variety is expanding. Today suppliers are in the situation where they have to start looking for alternative channels to move their merchandise, including produce,” he says.
Thanks in part to the recession, dollar stores are likely here to stay.
“Dollar stores are fascinating because they are the only format that can survive what I call the scorched earth syndrome of when Walmart comes in and wipes out the competitors,” says George of St. Joseph’s University. “Look around the country. You’ll see a dollar store near a supercenter all the time.”
And while you’re there take a look in the parking lot. “You’ll see people in there coming in Beemers and Mercedes and people driving 1972 Gran Torinos. It’s a real hybrid customer base,” George says. That’s because even rich people have changed their shopping habits.
“While previous recessions were milder and kind of left a bruise on the consumer, this one has left a scar,” says Pat Conroy, vice chairman of New York-based Deloitte, LLP. According to The 2010 American Pantry Study conducted by Deloitte and Waterbury, Conn.-based Harrison Group, Americans have re-learned how to shop, becoming more resourceful, using more coupons and loyalty cards for discounts and switching stores—and channels—to get the best price.
“The vast majority of respondents said they are never going back to the way they used to shop because we have now learned something,” Conroy says. “Obviously, this has implications for supermarkets and other channels.”
“What I’m finding is that people—especially in this economy—are really going after your deep discounters, including stores like Aldi,” says John Connelly, commercial retail supermarket consultant and land development specialist at MGM Realty, based in Shillington, Pa.
“Food has become shopper currency,” says Wendy Liebmann, CEO of New York-based WSL Strategic Retail. “Lots of other retailers, especially during this recession, have recognized that if people were buying nothing else, they still had to feed their families and were buying food. So lots of other retailers—drugstores, dollar stores, even home centers, came to understand that the value of that trip and that extra item in the basket was just huge,” she says.
Liebmann says shoppers crave flexibility. “`Let me shop anyway I want!’ is what shoppers are telling us,” she says.
Prescription for perishables
“How about a nice rump roast to go with that box of suppositories?”
That merchandising suggestion might not be that far-fetched now that Deerfield, Ill.-based Walgreen Co. is placing a heavier emphasis on perishables, opening up yet another area of competition for supermarkets.
During the annual shareholders meeting on Chicago’s Navy Pier in January, Walgreen Co. officials told shareholders the company will continue to expand its fresh food offerings, especially at its locations in “food deserts” in urban areas.
Walgreen may be taking a cue from its recently acquired Duane Reade chain in New York City, which is developing a reputation for foodstuffs. Duane Reade, New York’s leading drug chain, has been adding perishable foods to new and remodeled stores with those locations now featuring fresh-made chilled entrées such as lasagna and macaroni and cheese; pre-made gourmet sandwiches; salads; sushi; loose apples and pears; self-serve doughnuts, bread and rolls; dairy items including cheese, eggs, pegged luncheon meats, hot dogs, half-gallon milk, juice and apple cider; and frozen foods including Birds Eye vegetables and Stouffer’s, Amy’s, Ellio’s and Totino’s pizza, in addition to several aisles of grocery staples.
Last summer, Walgreen Co. redesigned some Chicago stores to include more than 750 food staples, including fresh fruits and vegetables, frozen meat and fish, eggs, cereals, pasta, rice and beans. According to a published report, CEO Greg Wasson said all of the company’s stores would be getting more fresh foods, but it was especially targeting 300 to 500 locations in food deserts throughout the country.
Supermarkets do have resources available to fight the competitive threats being put forth by dollar and convenience stores, experts say.
“One of the things supermarkets could do a better job of is to be more of an advocate for the consumer,” says Pat Conroy, vice chairman of New York-based Deloitte, LLP. “Supermarkets have the relationships with the brand manufacturers—the clout —to really play a partnering and influential role in things like recalls. They can do even more to make consumers aware of all they do,” he says.
By the same token, they should tout their credibility as a wellness store, says Wendy Liebmann, CEO of New York-based WSL Strategic Retail. “One of the opportunities a supermarket has is to tell a broader, bolder health story,” she says. “Kroger is doing that with its new store format in Kentucky and Wegmans is doing a lot with putting food information in the pharmacy. It gets people to start to think of their local supermarket as the place that helps them and their families stay healthy and affordably so.”
Supermarkets should determine specific product categories to focus on, which, depending on the competition, could be anything from beer to milk to prepared foods, says David Bishop, managing partner at Barrington, Ill.-based Balvor LLC.