Alternative formats vying for consumers’ share of stomach are giving traditional supermarkets a major case of heartburn, but the astute ones are fighting back.
Save big money at Menards—and while there shopping for a ceiling fan and some 2x4s, pick up a gallon of milk, dozen eggs, loaf of bread, can of soup, sack of dog food, frozen pizza and other grocery staples.
That is because in addition to a catchy jingle, the Eau Claire, Wis.-based home center chain has added rather extensive grocery departments to most of its 285 stores. One is its outpost in Alexandria, Minn., where Menards now directly competes against Elden’s Fresh Foods, a leading independent supermarket in town.
“Menards has between six and eight aisles of groceries,” says Elliot Christensen, president of Elden’s. “They basically do just a smattering of soups, cereal and snacks, but on the household side with the cleaners, laundry detergents, storage bags and wraps, they are huge and have far more selection than we do.”
Officials at Menards declined comment, but according to Christensen many of the items stocked are secondary and packer labels. “Whatever is available that they can get their hands on they will bring it in,” he says.
The bottom line is Menards’ grocery department has cut into Elden’s bottom line.
“It takes the customer out of the shopping pattern,” Christensen says. “If they pick it up there they don’t have to stop here. Menards works on a different margin than we do, so say we are charging $1.99 for a can of soup, they might be at $1.49, selling it at cost. The consumer thinks ‘they are making money and boy that grocery store is really taking advantage of me,’ but that is not the case. They’ve opted to give up all the margin and just make an impression.”
Home centers are just one non-traditional channel seeking to carve out a niche in grocery. Membership clubs, dollar stores, online shopping, drugstores, closeout centers, fast-casual restaurants, even furniture stores and fast-food joints like McDonald’s have jumped into the fray to nibble away at the supermarket stronghold by touting low prices on groceries or creating new eat-at-home meal occasions.
As a result, supermarkets have seen steady declines in market share. “Grocery stores have enjoyed a 90% household penetration, and are the most frequented vertical in the industry, so they had the traffic,” says Christy Bywell, vice president of national partnerships, at Cardlytics. “Now they are losing trips.”
An advertising and technology company, Atlanta-based Cardlytics works with retailers to help them reach consumers through the consumers’ online and mobile banking channel.
“Where do your consumers shop when they are not shopping with you?” asks Kasey Byrne, CMO at Cardlytics.
The answer is a wide variety of other outlets.
Using its “Whole-Wallet Analytics” technology, Cardlytics recently conducted a two-year study in Los Angeles tracking consumer credit and debit purchasing habits and found that 40% of consumers are spending an average of $400 less per year in traditional grocery stores because of changing shopping habits. According to the study, consumers are spending an average of $263 more per year which is a 20% increase at mass and warehouse clubs, including Costco, Sam’s Club, Walmart and Target; spending an average of $181 more per year which is an 18% increase at restaurants, and spending an average of $84 more per year at specialty grocers, including Whole Foods and Trader Joe’s.
“We found that 22% of Los Angeles households maintained their spend at grocery, and 37% increased, but there were 41% that decreased,” Bywell says. “Customers are leaking their trips to other places. We saw an uptick at specialty grocers, like Trader Joe’s, Sprouts, Whole Foods and Fresh & Easy. They are stealing trips and dollars from traditional grocery stores. Drugstores saw an increase, and we included restaurants. When you go and pick up your dinner at Panera Bread that is potentially one less rotisserie chicken you are picking up at Ralphs.”
Dollar General Corp., based in Goodlettsville, Tenn., operates 11,000 stores in 40 states, averaging 7,200 square feet and stocking 10,000 to 12,000 SKUs. Billing itself as “the country’s largest small box discounter,” it touts the savings offered on name brand products from Kimberly Clark, Procter & Gamble, Unilever, Kellogg’s, General Mills and Nabisco.
Dollar Tree, based in Chesapeake, Va., operates more than 4,900 stores in the 48 contiguous states and five Canadian provinces. Everything in the store is $1.00 or less, a fact not lost on management. “Overwhelmingly, the two comments we repeatedly receive are: ‘I can’t believe this cool item I just found at Dollar Tree!’ and ‘I can’t believe it’s only $1.00!’” the company notes on its website.
Family Dollar, another major dollar store player, made headlines earlier this year when it announced it was closing 370 stores following a poor second quarter. But the Matthews, N.C.-based chain still operates approximately 8,000 outlets in 46 states and said it was lowering the prices on 1,000 “basic items to deliver more compelling values to customers,” creating a more cutthroat competitor to the local supermarket in the process. Recent circulars and coupon books stress name brands, including Stove Top stuffing, Velveeta Shells & Cheese, Oscar Mayer turkey, Clorox brand bleach, Sparkle paper towels and Tide detergent.
“In the dollar store channel cleaning and paper products are huge,” says Heather Bullington, vice president, at Catapult, an integrated shopper marketing agency in Nashville, Tenn. “They are trip drivers into those stores for shoppers that are in the know. They know that paper towels are paper towels no matter where they buy them. And if they can get them more cheaply at a dollar store then they are absolutely going to go there.”
Dollar stores, Bullington adds, have improved on the misguided perception that they sold short-coded product and did not have a steady inventory. “There is consistency with what they carry and they do have trusted national brands,” she says.
That is attracting a more well-heeled shopper.
“Thriftiness is so en vogue at this point,” Bullington says. “Dollar stores are doing a lot to upgrade their image with nice, clean, beautiful stores. At the same time, the perception of going into a dollar store has changed tremendously since the recession, and they have seen a lot of growth from mid-tier shoppers.”
Really thrifty shoppers have been turning to stores that specialize in merchandise closeouts, opportunity buys and manufacturer overruns. One of the largest is Ocean State Job Lot, a North Kingstown, R.I.-based chain of 112 stores throughout New England, New York, and as of this summer New Jersey. “We buy close to the source; we don’t go through middlemen whenever possible,” says Alan Perlman, co-owner/partner. Among the items stocked are food, clothing, pet products and seasonal items, like gardening supplies.
“Food runs about 18-20% of our total sales,” Perlman says. The bulk of that is from specialty items, such as olive oils, imported cookies, Bob’s Red Mill grains, and the like.
“As a generalization, when it comes to specialty foods supermarkets tend to go through distributors. There are slotting allowances and other things, so there are different mark-ups on specialty foods than on a can of peas,” Perlman says. “We don’t care where we buy the food; we are only concerned on what we are paying for it. We buy a tremendous amount of specialty foods directly from manufacturers and importers. With our margins it drastically reduces the price. Somebody who might not normally be able to afford a specialty item can afford it in our store.”
Still, Perlman does not see his chain as a threat to supermarkets. To the contrary, he sees it as an ally.
“Supermarkets look at us as a threat,” Perlman says. “But when you have an off-price item on closeout you’re introducing people to an item they may never have had before. If they like it and we no longer carry it they are forced to go to the supermarket and pay full price. In a lot of ways we are an opportunity for the mainline individual that carries that item on an everyday basis,” he says. “We actually widen the demand, and in the long term that is beneficial to everybody.”
National name brand manufacturers have been courting alternative formats as a way to retain and build market share in the wake of an onslaught from private label, observers say.
“There is really interplay between the growth of these new channels and the focus that the bigger CPG manufacturers place on getting distribution there,” says Bill Bishop, chief architect at Brick Meets Click, based in Barrington, Ill.
L.H. Hayward & Co., the Harahan, La.-based manufacturer of Camellia Brand dry beans, peas and lentils, is one company looking to grow sales, distribution and exposure by expanding into other retail channels, including dollar stores.
“In terms of traditional grocery stores being cannibalized by these alternative channels, my reaction is that it is good for the industry, the consumer and for everybody in terms of forcing innovation and forcing people to step up their game and making the grocery stores be more responsive to their customers’ needs,” says Vince Hayward, CEO of L.H. Hayward.
“People are always going to need eggs and milk and there are always people who are going to go to their traditional grocery store for that,” Hayward says. “This is an opportunity for the grocery store to capitalize on that shopper and really take advantage of those shoppers they have coming in and drive them to the center store.”
However, an increasing number of consumers are turning to drugstores for those pantry staples.
“I see drugstores becoming a greater threat to supermarkets as they are positioning themselves as a one-stop shopping destination,” says Kevin Ruddy, vice president, marketing and sales, at Elite Display USA, a Kenilworth, N.J.-based in-store signage and consulting firm. “They are increasing their conventional grocery SKUs, and they are preparing to enter into perishables and prepared foods. They are going to be a tough competitor.”
Duane Reade, a New York-based division of Walgreens, is doing just that. Its new and remodeled stores contain sushi bars, juice bars and a wide assortment of freshly prepared sandwiches, salads and chilled heat-and-eat entrées.
“The fresh business is a highly successful complement to our traditional grocery business, catering to a grab-and-go focused customer segment,” says Calvin Peters, public relations and digital communications manager at Duane Reade. “This customer segment visits Duane Reade/Walgreens the most frequently versus other customer segments. The fresh program offers ‘better for you’ grab-and-go products that are typically purchased for immediate consumption. These products are made fresh daily.”
Walgreens and Duane Reade have been stepping up their grocery offerings in recent years with a wide assortment of DeLish and Nice private label candies, nuts, snacks, coffee, frozen, fresh and other grocery and household items. “The focus of the brand is to provide the customer a differentiated experience from traditional brands through quality ingredients and unique packaging,” Peters says.
“The mission of the grocery business at Duane Reade and Walgreens is to be our customers’ most convenient and trusted designation for grocery and household fill-in trips as well as grab-and-go consumables,” Peters says.
While drugstores are targeting the immediate consumption market, online retailers, such as Amazon Fresh, Peapod and Fresh Direct, are making inroads with frequently purchased household commodities and grocery staples.
“Online shopping is still not a big part of the business, but it is getting bigger, and it is consumer knowledge that is going to drive growth in those channels,” says Mark Hardy, CEO of InContext Solutions, a Chicago-based provider of virtual store simulations for CPG manufacturers and retailers. “People are online because they have a list and don’t want to spend a lot of their day in a store browsing for groceries. It is a great way to make some things more convenient, such as paper towels ordered on cycle and delivered to you so you don’t have to carry bulky things.”
“Online shopping is going to continue to grow,” says Dr. Richard George, professor emeritus, at St. Joseph’s University in Philadelphia. “Amazon Fresh is coming to the East Coast and there is speculation that they are coming to Washington, D.C., very soon.”
Competition is also coming from such diverse retailers as catalog houses and furniture stores.
“Non-traditional retailers are expanding into the ready-to-eat and heat-and-eat fresh food niche—the ‘grocerant’ niche,” says Steven Johnson, the grocerant guru at Foodservice solutions in Tacoma, Wash. He cites mail order fruit firm Harry & David as one example. “This year they delivered Easter brunch,” he says. “It is incremental for them to add ready-to-eat and heat-and-eat food, whereas on the grocery side it is detrimental to them. Today’s consumers don’t want to cook. They want to assemble a meal.”
They can assemble a meal of Swedish meatballs and lingonberry jelly with the couch they bought at Ikea.
“Ikea does $2 billion system wide in sales of ready-to-eat and prepared foods,” Johnson says. “If you put that on the National Restaurant Association’s list it would be in the top 25 chain brands in America. And that’s a furniture store. People overlook the points of competition.”
Grocery store stealers
According to Johnson, the biggest threat to the supermarket is from the restaurant channel. Boston Market, for example, featured complete catered Easter dinners for 12 for $104.99 this past Easter—only $8.75 per person.
“Olive Garden has a special where you buy one meal for $12.95 and get another to take home,” Johnson says. “That is a ‘grocerant’—a ready-to-eat prepared meal. It is a grocery store stealer. It is not about market size. It is now about share of stomach.”
And now the Hamburgler is stealing sales from supermarkets. “McDonald’s made a significant and tremendous leap this past fall when they were selling a 20-piece Chicken McNugget as a meal component,” Johnson says. “It was not designed as a meal for a single person. When you think of grocery stores and what is on the horizon the problem is that there are many more locations of McDonald’s than Safeway, Albertsons or Aldi.”
However, traditional supermarkets can fight back.
“Grocery stores need to find out how to make their stores fresh,” Johnson says. “They need to delete a lot of stuff in the middle and put fresh stuff in, non-traditional things. Consumers want ready-to-eat prepared food.”
They also want a pleasant experience.
“When it comes to food shopping there is variety, convenience and the atmosphere or ambiance,” George says. “The online people have taken away variety and selection, but when it comes to ambiance, unless you are going to get Amazon to open stores, we should still own that. If we can figure out how to make the stores exciting and fun it would force these guys to do brick-and-mortar.”
Bishop says supermarkets should examine their own histories to find ways to fight back. He cites the 1970s development of food/drug combination stores that stole business away from the corner drugstore.
“Supermarkets need to be much more alert and opportunistic at finding segments of the business that they themselves can take from someone else,” Bishop says. That might entail sending the store dietician to local businesses as a resource to their own health and wellness programs, he says.
“As in any business, supermarkets must distinguish themselves from their competition, focusing on things they can do uniquely well—things that nobody else can copy quickly,” says Ruddy of Elite Display USA. “Supermarkets must become the food authority.”
That is exactly what Elden’s is doing.
“In our store today we have put the emphasis on perishables,” Christensen says. “We still offer great variety in center store, but we emphasize the variety and freshness at the perishables level, and it has really helped us. It has built our business. We have a slogan ‘When quality counts, count on Elden’s.’ People talk about that. We have the best quality.”
Literally thinking outside the box can also help.
“Supermarkets should not be looking at new retail concepts, but new shopping experience concepts,” says InContext Solution’s Hardy. “How often do you go to a grocery store for dinner and a date? Yet that is exactly what you can do at Mariano’s in Chicago. Think occasions. Come at it from the shopper’s point of view and look at their lifestyle and their occasions around their lifestyle. Make it easy for them to fit into that.”
He cites a Tesco store in London that has installed a nail salon. “It was packed with shoppers sitting there with a shopping cart next to them getting their nails done. Tesco is eliminating the need to stop at a separate nail salon. It creates a reason and an added service that takes the shopping experience to a whole other level,” he says.
The rot has stopped
A brighter future is already dawning for the supermarket industry, some say.
“The big message is that the rot has stopped for the supermarket industry,” says Dr. David Rogers, president DSR Marketing Systems, based in Northbrook, Ill. DSR tracked Census data and found that the U.S. grocery market stands at $685.5 billion in 2013, with supermarkets maintaining a market share of 58.4%.
“There has been success with growth formats like Aldi, Sprouts and Whole Foods, and successful chains such as H-E-B, Kroger, Publix and Wegmans,” Rogers says. “The media talks about alternative formats like Aldi and Whole Foods as if they are an entirely different animal, but to the Census Bureau and many shoppers, they are grocery stores like any other and are a part of the industry.”
Supermarkets have been holding their own against drugstores too, Rogers says.
“We’ve heard a lot of noise from the drugstore people but they just really aren’t selling that much food,” Rogers says. “Their growth period in grocery was 2000-2005. Since then they have really gone nowhere.”
“Supermarkets are being threatened by all of these big box stores and alternative formats, but if supermarkets do the right job and stay true to their core values they can get the customers back,” says Ruddy of Elite Display USA.
As Ocean State Job Lot delves deeper into groceries, the 112-unit North Kingstown, R.I.-based closeout retailer has been expanding its support of local food banks.
This year its “Three Square Meals” hunger relief program will distribute 78 tractor trailer loads of food to 13 local food banks and pantries across New England and on Long Island. The company supports local food banks throughout the year, but to raise awareness about the hunger problems in its area, Ocean State Job Lot organized a massive effort where 11 tractor trailers left headquarters for 11 different food banks on one day.
“It was attended by our governor and escorted out of our headquarters by the state police,” says Alan Perlman, co-owner/partner. “There was TV coverage here and at each location where a truck went, so it brought a lot of attention at the local level. In addition to our 11 trucks, we had four of our vendors participate by supplying a truck, and we had a special deal with Kellogg’s where we had 12 trucks of cereal on the same day get sent to those food banks. So we had 27 trucks go out in one day and we are very proud of that.”
The four trucks were donated by Bank of America, The Providence Journal Charitable Foundation, Polar Soda of Worcester, Mass., and Bob’s Red Mill.
“What is really good is when we have the ability to purchase product directly from Kellogg’s or other vendor’s, the item might be too short-dated for us to sell, but the food banks can use it right away,” Perlman says.
In addition, from Thanksgiving through Christmas, Ocean State Job Lots asks its customers to donate cash to the food banks at the register. Last year that effort raised $1.2 million and the chain donated an additional $100,000 through its foundation. All of the expenses of picking, packing and shipping the groceries to the local food banks in each operating area are picked up by the company.
“What makes our program unique is that not just 100% of the money goes to folks in need, but it is actually delivered back to the communities where the money was donated,” says David Sarlitto, director of marketing at Ocean State Job Lot.
“We’ve been involved in charity since we started in 1977,” Perlman says. “In the beginning we did it very quietly. The good thing about advertising your charity is that maybe it induces somebody else to give, but it is also a sign of pride for your employees and associates.”