Supermarkets – the Growth and Evolution of an Industry
The grocery industry represents a case study in diversification over the past 30 – 40 years. Not racial or ethnic diversification, but an evolution to better address different consumer desires. Part of this change is attributable to the increasing fragmentation of the American consumer, and part to visionaries in the food industry. This explosion of alternative formats has been a boon to consumers, who now have the ability to choose their preferred shopping venue based on location, merchandise selection, merchandise quality, and price.
In the 1970s and 1980s, most supermarkets were conventional operators, with a primary focus on food (generally accounting for 70-80% of total store sales). Their primary drivers were locational convenience, an emphasis either on everyday low prices or sales prices, and the presence of selected service departments (such as a bakery, deli, or meat counter). Examples of dominant supermarket chains at the time include A&P, Safeway, Kroger, Ralphs, Publix, Fred Meyer, Super Valu, and Winn Dixie. Overall, their similarities outweighed their differences, producing a retail landscape not dissimilar to the banking or drug store industry today.
Today, the food store industry provides a wide variety of choices to consumers:
- Extreme Value Formats – several supermarket chains cater to the needs of consumers looking for good value in an easy-to-shop, convenient location. Some of the primary operators in this space today are ALDI, Save-A-Lot, and Food 4 Less. While traditionally these stores catered to lower-income consumers, they are also targeting more affluent shoppers looking for good value.
- Dollar General and Family Dollar are discount operators that specifically cater to consumers looking for convenient locations offering both good value and smaller product sizes, enabling customers to meet their immediate food needs for as little a cash outlay as possible.
- Discount Department Stores – several discount department store chains have successfully added food to their offering, to the point where discount department stores represents the dominant food store retailers in many markets. Walmart Supercenters is the dominant operator in this space – after initial joint-ventures with supermarket operators and an attempt at a new hypermarket concept, they have successfully added food to their hard lines offerings. (In fact, Walmart is so strong that they could comprise their own category). This category, more than any other, has chipped away at the market share of conventional supermarkets. A handful of true “hypermarket” chains still exist in the U.S., including Fred Meyer (now owned by Kroger) and Meijer, an independent Michigan-based operator.
- Warehouse Clubs – the warehouse club industry, pioneered by FedMart and Price Club (and currently dominated by Costco, Sam’s Club, and BJ’s Wholesale Club), provided consumers with the ability to buy significant quantities of merchandise at significantly discount prices. The warehouse club industry initially focused on small business customers, but rapidly found that upper middle income households accounted for the majority of sales. Despite their aggressive pricing, warehouse clubs generally don’t represent a viable option for many low income consumers – they are dissuaded by the annual membership fee, and simply don’t have the means to purchase the bulk sizes offered at warehouse clubs.
Organic and Natural Food Stores – these operators cater to better educated and more affluent households seeking better quality merchandise. Whole Foods represents the largest operator in this space, although their focus has shifted somewhat away from the original hard-core, “crunchy granola” organics shopper and toward a more affluent consumer. Other significant operators include Sprouts Farmers Market and Wild Oats. There are a wide range of other retailers in this space as well, including local co-ops and regional chains.
Unique Operators – there are several food stores that have thrived by charting their own course, including Stew Leonard’s (metro New York operator that started as a produce and dairy store), Wegmans (a dominant operator that almost looks like the combination of a conventional supermarket chain with a high-end department store), and Trader Joe’s (which has carved out its own niche in the industry).
Other Retailers – convenience-oriented retailers ranging from gas stations to drug stores have added food to their offering, attempting to provide consumers with a more convenient option for selected merchandise.
Conventional Supermarkets – yes, the convenient supermarket chain is still alive and kicking today, and continues to account for a significant share of overall food expenditures. Operators such as Kroger and Publix have invested millions in new store developments and remodels, and continue to be strong operators. Some conventional operators are growing through acquisition, while others are focused on organic growth.