by Kristen Cloud/staff writer
The phrase that grocery retailers and industry leaders have used time and time again over the course of 2012 to describe their feelings on the economy is cautiously optimistic. Nowhere, perhaps, has this expression been heard more than in the United States, where unemployment remains high throughout most of the nation and, despite the lagging economy, competition from non-traditional grocery formats is booming.
Premium, discount, ethnic formats thrive
Keith Anderson, VP and senior analyst for RetailNet Group, an insight and advisory firm with specialized expertise in forward-thinking guidance pertaining to retail growth, tells The Shelby Report that, across the nation, there continues to be steady demand for premium grocers, discount formats, as well as an uptick in the ethnic segment. Smaller locations also are becoming an ideal setup for grocers.
“What we see at the high end is there’s a steady demand for Whole Foods, The Fresh Market and other sort of differentiated premium grocers,” Anderson says. “But, candidly, there’s a much bigger addressable market for the opening price-point position banners that sell the essentials at a really great value.
“Beyond the discounting, clearly proximity-based stores or small boxes that are closer to where people live and work are the only type of brick-and-mortar format that’s getting much capital investment,” he adds. “And there’s a growing level of intense competition among the retailers that have buildings under 40,000 s.f., all the way down to and including convenience operators, discounters and the drug channel, and we’ve seen from both the leaders—Walgreens and CVS—this push into to-go foods, sometimes ready-to-eat foods.”
Michael J. O’Connor, president and CEO of the Virginia Petroleum, Convenience and Grocery Association, estimates groceries now make up between 10 and 15 percent of most drug chain stores, “whereas 15 years ago you didn’t see any groceries in a chain drugstore,” he tells The Shelby Report. These large grocery offerings, he adds, are especially noticeable in rural markets.
Other formats are making inroads in groceries, and to-go and prepared foods, too.
“The convenience operators are competing with QSRs (quick-service restaurants),” Anderson says. “The discounters, like Dollar General, continue to add food and consumables to their buildings, now adding coolers in Dollar General Markets, so they actually are selling perishable groceries.
“And then regionally, you look at California, for example, there are chains like 99 Cents Only that have also created kind of distinct formats at the opening price point side. And on the bulk side, even WinCo Foods in the Pacific Northwest is doing very well—it’s another discount-oriented banner.”
In addition, the ethnic segment is a growing, and often overlooked, one.
“We see big growth regionally in ethnic grocers that have brought a level of authenticity in the assortment—that is the brands that people grew up with in their home country are on the shelf; the employees come from the community; the celebrations celebrated in their culture are celebrated in the store, and the seasonal merchandising reflects that,” Anderson says.
These community-oriented stores truly demonstrate how Al Plamann, CEO of Los Angeles-based Unified Grocers, defines local as a point of differentiation—through the neighborhood, products and employees.
“Local can mean a lot,” he tells The Shelby Report, “and I think local can be one significant point of differentiation for our retailers, particularly in these highly competitive marketplaces…”
“Whether it’s a Hispanic or an Asian or an East Asian store, we’ve seen examples throughout North America of these very successful regional chains of 25 or 50 stores that are kind of flying below the radar in a lot of ways,” he says. “But in aggregate, they represent another pretty meaningful pocket of growth in the grocery business.”
Because of the increasing success of these unique premium, discount and ethnic formats, the “big middle,” as Anderson calls it, is where the most risk lies.
More pressure on the center store?
The so-called erosion of the center store has been a point of discussion among industry experts for some time. Coupled with the influx of shoppers looking for more healthful options around the perimeter, there now appears to be a more pressing trend that is impacting center stores sales: online shopping.
Anderson reveals that, though the “center store is not going to disappear,” online shopping—particularly for baby items—is one of the more salient trends putting pressure on the middle of the supermarket.
“Baby products, inclusive of diapers, formula—we think close to 20 percent of that category is online,” he says.
Amazon’s Subscribe & Save program, he notes, is responsible for much of this shopping migration to the web, particularly as it relates to the baby category.
“Basically what Amazon did, to some categories that were truly essential to new mothers, was it created this unbeatable value of a 5 percent discount stacked on top of a 15 percent discount for agreeing to an auto-replenishment program that would just ship the formula and diapers at an (agreed-upon) frequency.
“Now the discount has had to come from 15 percent down to 5 percent because, as you might suspect, it’s tough to make money shipping product at a 20 percent discount, but those are categories that have seen incredible growth online,” Anderson says. “And I do expect the perimeter and perishables to become even more important as a point of distinction and differentiation (for the brick-and-mortar grocer).”
Plamann, for one, is convinced that the convenience of online ordering, particularly among younger shoppers, in some categories—such as baby products—is cutting into sales inside traditional stores.
“And it probably will continue, too,” he adds.
There is good news for grocers, however, as less than 2 percent of online food and consumables is sold online today, according to Anderson.
“I don’t want to suggest that we’re insulated, but we’re relatively less impacted than people who sell non-food.”
A personalized mobile experience through loyalty, targeted offers
As online shopping has yet to go mainstream where groceries are concerned, many supermarkets are taking a cue from web-based retailers and placing much of their focus on providing shoppers with a personalized experience, particularly as it relates to mobile devices.
“Obviously Amazon is not a big player in food or grocery, but Amazon has had the advantage of being able to dynamically merchandise and dynamically market to a shopper that is on their site,” Anderson says. “And what some (personalized grocery shopping tools) are enabling is the ability to do exactly the same thing in the store.”
Safeway, for instance, rolled out its “just for u” platform earlier this year—offering tailored coupons and deals to program participants.
“If you look at the success that Kroger has had, sort of powered by dunnhumby over the last decade, in competing with Walmart and growing comps, net of fuel and net of inflation, during a pretty hyper-competitive era, I don’t think anybody that sells food would deny the power of loyalty and targeted offers,” says Anderson.
Safeway is a client of RetailNet Group. Anderson comments as an observer, not based on any work he’s done for the Pleasanton, Calif.-based company.
“I think Safeway has concluded that there’s incredible power in one-to-one targeting. It reflects the value of a household or an individual shopper and lets me personalize offers and price so that I can incentivize and reward behavior via price and value in a way that my competitors can’t necessarily see.
“That’s the elegance in just for u; it has nothing to do anymore with what your shelf price is because the shelf price and the net price that a just for u member pays could be very different. And competitors won’t be able to understand which items are getting those better values and which shoppers are getting those better values.”
Additionally, Safeway reported in September during the Goldman Sachs Conference that its mobile just for u participants are spending double digits more than the standard just for u card participants.
“Anecdotally, if you’ve played with the app, what you’ll discover is it’s a little bit addictive seeing what offers are there for you when you get to the parking lot and then you start to navigate the store,” Anderson says. “It’s all very personalized, and I think when you look at new programs, like the Walgreens Balance Rewards loyalty program that launched in September, mobile is not a secondary platform to engage shoppers with for these new programs.
“Wherever possible they want to lead with mobile because (the mobile device) is the most personal possession that a lot of people feel they have. It’s the first thing they look at when they wake up, besides their keys and their wallet; it’s what they carry with them everywhere; and it’s a unique identifier.
“It’s powerful because not only does it identify me, but it gives me the opportunity to engage the shopper in real time before the store and in the store.”
The future of online grocery ordering: drive-thru curbside/window pickup a format to watch
Peapod for years has provided online grocery shopping and delivery. It expanded on the concept earlier this year by launching a mobile-powered “virtual grocery store,” first in Philadelphia in February and then later in Chicago.
The Royal Ahold subsidiary’s virtual store program for commuter rail stations allows passengers to do their grocery shopping during their commutes. Smartphone users scan a QR code to download a free PeapodMobile app in order to shop by scanning the barcodes of the products featured in the ads.
“Mobile shopping walls, which have been sort of a phenomena over the last 18 months ever since Tesco did the first one with the Homeplus banner in South Korea, have been a very interesting marketing vehicle in the sense that they look interesting, they’re new and unfamiliar, they drive awareness and they may drive trial for people who have never actually ordered groceries online,” Anderson says.
“I think when you get to the practically of it, though, it’s very difficult to imagine that you’re going to have large numbers of shoppers substituting large numbers of traditional grocery trips by scanning 2D barcodes on the subway, instead of walking through a store.”
Anderson points out that one of the most challenging obstacles in converting traditional grocery shoppers to online grocery shoppers—as online retailers like Peapod, AmazonFresh or FreshDirect admit—involves the first order.
“There’s so much habit built up in driving to a store, pushing a cart through the store and driving home that the idea that you’re going to click around on a site and build a basket by clicking category by category is very difficult,” he says.
Peapod, to help counteract this dilemma, has created a feature that will allow a shopper to pre-populate an online order based on what they bought in store on a past trip using a loyalty card.
It also has shifted to an “integrated approach,” according to Anderson.
“Peapod allows shoppers who don’t want to go to the store the option to have a full basket of groceries delivered and, in some cases, either the shopper won’t want to pay a delivery fee, or it’s economically unviable to deliver to the shopper.
“So the notion of curbside pickup, or drive-thru, is a really interesting new idea that isn’t so new. We’ve had drive-thrus in pharmacies and fast food for decades, but it’s a relatively new idea in North America for groceries. And yet when we look at France, and increasingly Germany, this drive-thru concept is the only brick-and-mortar retail format that’s growing its store base in a meaningful way.”
“The drive-thru, or the curbside pickup format, entails ordering online, the store staff picks the order from the store’s inventory, stages it and then you pick it up within a pickup window. The price is the same, you’re in an out in five minutes or less. Peapod and Stop & Shop are piloting something like that here in Massachusetts.
“But we think for a lot of reasons, not least of which the convenience and the time savings, but also the more favorable economics of it, make it a really interesting format to watch.”
Peapod also offers shoppers another alternative—besides delivery or drive-thru pickup. Once a shopper has created their list, they can go to a store and load the list to their mobile device.
“Not only can you find what you’re looking for in the store, you can scan and pay with your phone and skip the line altogether,” Anderson says.
“The shoppers are not quite ready for this—or at least the mainstream shopper is not,” he says. “The under-35 shopper is ready. Now they don’t have big households yet; they’re not the generational cohort with the most spending power but, by the end of this decade, they likely will be.”
While Anderson doesn’t forecast 2013 to be the year that retailers abandon a fixed checkout and install a curbside pickup station at their stores, he does predict that many more grocers will begin to embrace these ideas “because what we’ve learned is the shoppers that migrate fastest to this are the highest income shoppers, firstly; and the youngest shoppers, secondly. And they are incredibly high lifetime value shoppers.
“It doesn’t take a majority of those shoppers to change their behavior,” he adds. “Even something as simple as shifting 15 to 20 percent of their annual grocery spend into a delivery model really changes the economics for the stores they use to shop.”