The traditional grocery store is quickly losing its share of stomach to a host of new and improved competitors doing a better job of meeting their consumers’ evolving needs.
One of the biggest challengers: convenience stores, which are offering a better assortment and an improved customer experience. This takes the form of prepackaged foods, often with healthy, fresh and organic choices; customizable experiences leveraging in-store technology like sandwich counters and smoothie bars; and customer engagement–focused store associates.
A few of the many examples of this change: Triangle Stop c-stores in North Carolina sell craft beer on tap, while Kwik Trip sells 400 pounds of bananas per store per day and saw bulk produce sales grow 5.5% in 2015. Meanwhile, Sheetz is experimenting with new urban formats that don’t sell gas, and Wawa is investing $700 million to remodel 430 stores to improve their store experience.
All told, these types of improvements are driving sales of in-store merchandise, which currently generates about 29% of c-store sales and is increasing at a combined annual growth rate of 3.6%, according to Planet Retail.
Another threat comes in the form of big-box retailers like Target, who are shrinking their footprint and offering more produce and to-go choices, and drug stores like CVS and Walgreens, who are offering food staples like bread and milk. CVS is expected to grow its store base 1.1% a year and sales 3.3% between 2013 and 2018, while Walgreens’ store base is expected to grow 1.9% and sales 4.0%.
Dollar stores and other discounters, like Aldi or new entrant Lidl, are also getting in on the action. Dollar General is opening more of its “Market” stores with fresh produce and other groceries, and consumables now represent 75% of the retailer’s sales, up from 69% in 2008. These retailers have focused on offering prepackaged foods and low prices vs. the service emphasis trend seen in many convenience stores.
These small-box stores are some of the fastest-growing banners, with their sales projected to hit combined annual growth rates of 17.8% for Dollar General Market, 14% for 7-Eleven and 9.4% for Aldi between 2013 and 2018, according to Planet Retail.
So it’s no surprise that the average food store size is expected to shrink from 25,500 square feet in 2013 to 23,900 square feet by 2018.
CONSUMERS INCREASINGLY HUNGRY FOR CONVENIENCE
What’s driving these market shifts? Time-crunched, convenience-obsessed, deal-hunting consumers in urban areas where space is at a premium.
One in five consumers says their daily eating approach is “eating on the run,” according to IRI, while 20% of meals are eaten in a car and one in four Americans eats fast food every day, according to Do Something.
Fill-in shopping trips have grown 23% in the past six years, and discounters, small-format fresh food markets and dollar stores are winning the share game for these trips, with 30%, 27% and 18% market share, respectively, according to the Food Marketing Institute (FMI).
According to a Kurt Salmon study done for the Coca-Cola Retailing Research Council, to be published this fall, 86% of consumers shop at more than one store for groceries. Conventional grocers are increasingly competing with specialty and organic-focused stores for grocery-type items, including food, beverages, paper goods, health and beauty items, and cleaning supplies. (See Exhibit 1.)
As non-traditional food retail formats continue to add perishables, they will become increasingly attractive, especially to younger consumers. In fact, 57% of Millennial shoppers already purchase some of their groceries at a c-store, according to Convenience Store News. So it’s not surprising that foodservice sales at c-stores grew 6.3% in 2014.
That’s because, when it comes to buying groceries, convenience ranks second only to cost, according to a King Retail Solutions study.
In a 2015 survey of traditional grocers, FMI found that they ranked convenience stores and dollar stores ninth and tenth in terms of impact, right above farmers markets—not to mention online threats like Amazon, Blue Apron and Purple Carrot.
WHAT’S A FOOD RETAILER TO DO?
To respond effectively to this unprecedented channel blurring, food retailers need to refine their value proposition and understand why their consumers are choosing other channels.
By clarifying their value proposition—such as top-notch customer service, lowest prices, all organic or grab-and-go—and relentlessly pursuing it, food retailers can help themselves stand out from the fray.
First, retailers can better define their value proposition by using analytics and consumer insights to zero in on their target customers, their values and needs, where they live in high concentrations, and which competitive positions are left open and ready to exploit in those areas.
Whole Foods’ new 365 concept, which includes a higher proportion of private-label items and smaller stores, is designed to fit better into increasingly urban locations and cater to the often younger, cost-conscious consumers who live there.
Next, refine your assortment, which will become even more important as store sizes continue to shrink, and develop the right store experience. One North American multibillion-dollar grocer with more than 1,000 doors took this approach, localizing its assortment to drive revenue lifts of 1% to 3%.
Last, leading food retailers are using a cost-to-serve approach to create more agile and efficient supply chains. One grocer recently implemented a new, more flexible delivery model with the ability to change delivery frequency by store and by product while improving product flow, and it put into place distribution facility productivity improvements for its convenience stores that reduced distribution costs as a percentage of sales by 12% while maintaining product availability and freshness parameters.
For another example of a new approach to grocery retailing, consider Giant Eagle, which is shrinking its stores and focusing on high-quality, upscale, quick-to-grab foods with its Market District Express stores. They’re 15,000 square feet and include a soup and salad bar, sushi, a casual restaurant with seating, full-service pharmacy and a GetGo gas station.
Meanwhile, Kroger is reinventing its Turkey Hill banner in the image of a corner neighborhood market vs. a traditional convenience store, featuring a mix of produce, Kroger private-label food and prepared grab-and-go food, all at supermarket pricing (vs. sometimes higher c-store prices).
Ahold USA is also experimenting with smaller formats at its Stop & Shop stores and devoting more space to fresh food. Ahold has plenty of experience running smaller formats throughout Europe and is bringing that expertise to bear in the United States.
As these examples show, traditional grocers are not powerless against the many new competitors surrounding them. In fact, by getting a clearer understanding of their customers and using that value proposition to build a better assortment, supply chain and customer experience, grocers can regain some of their lost share of stomach—and maybe even win more than they’ve ever had.
6 July 2016