Traditional grocers are facing a massive problem: how to maintain and grow their share of consumers’ stomachs when fighting off new niche competitors, discounters and different formats like c-stores and e-commerce.
But even though the problem is huge, some of the solutions are quite small: specialty mushrooms, cherry tomatoes and baby carrots.
That’s because consumers are willing to hit multiple stores to cherry-pick the best produce from each: Over 85% of grocery shoppers hit multiple food stores in the past three months, according to a recent Kurt Salmon survey of more than 1,000 consumers.
Not only does produce tend to be the most important reason for consumers to select a store, but 57% of them say they’d make a special, incremental trip to an out-of-the-way store for better produce, second only to meat. (See Exhibit 1.)
As consumers continue to focus on improving their health and food quality, one way for grocers to differentiate themselves and earn some extra green is by focusing on greens—and apples, tomatoes, mushrooms and more.
Fresh New SKUs
In many food retailers, the space devoted to produce is growing like a GMO tomato plant. For example, in one North Carolina location, Costco is adding 6,000 square feet of retail space for produce coolers, enlarging the produce section by 50%.1
Costco is no exception. Around the country, additional square feet are being allocated to produce to meet the demand generated by four different consumer trends.
1. Specialty. Consumers are seeking out new and different produce varietals, such as niche mushrooms like enoki, shiitake and oyster. The same is true for peppers, both spicy and sweet, and tomatoes like hothouse and kumato. (See Exhibit 2.)
But perhaps nowhere is this specialization deeper than in salad greens, where consumers are increasingly snapping up not only kale, but arugula, frisee, endive, radicchio, mizuna, escarole, baby beet greens, cress, tatsoi, mache, oakleaf and more. Kale, for example, experienced a 43% compound annual growth rate from 2010 to 2014 on the back of the healthy eating movement.2
2. Organic. On top of new produce varieties, retailers are seeking to address consumers’ increasing demand for organic and non-GMO varieties, as 54% of consumers surveyed by Kurt Salmon say they pay close attention to what they put into their body.
Organic produce is the fastest-growing segment within Meijer’s produce section. While all organic produce used to be organized into one small section, Meijer has expanded its organic produce offering and now stocks organic choices across nearly all sections.3 Even value player Aldi has recently expanded its organic produce selection.4
3. Local. Locally sourced produce is also growing in importance for many consumers, and grocers are rushing to respond. Take Kroger, for example, which used to have centralized buying groups and category managers, but now buys regionally for key local produce categories such as mushrooms to ensure next-day delivery and freshness.
4. Convenience. Time-crunched consumers are also fueling the growth in “value-added products.” For example, consider pre-sliced apples—sales have grown 255% from 2004 to 2014.5
And it’s not just apples. Increasingly, busy consumers are also clamoring for more single-serve packaging options, such as grab-and-go cups of cherry tomatoes made for snacking. In fact, sales of all value-added fruit (which includes only fresh products, not frozen or canned) grew at a compound annual growth rate of 7.1% from 2011 to 2015, while sales of value-added vegetables grew by 8.7% per year, compared to just 2.9% for all produce during the period.6
Putting Produce to Work
Not all food retailers have the ability or desire to chase all four of these consumer trends. Leading grocers have realized they have to right-size their produce strategy based on their brand positioning, store traffic and available shelf space.
Brand positioning. The most important factor when considering whether to add further produce varieties is the store’s positioning. Stores positioned as “value” or “low priced” have difficulty adding more-expensive SKUs to their produce selection. In contrast, mainstream grocers who target a wide range of customers are challenged to get credit for adding organic and local products because of their “conventional” brand reputation.
Shelf space. To increase variety, retailers obviously need more shelf space, either via growing their footprint, remodeling the store, reducing space allocated to other departments or discontinuing some existing produce SKUs. On average, produce departments have been growing three to six square feet in new stores and as a result of remodels.
Store traffic and consumer demand. Adding more variety without reducing the space allotted to each SKU can run the risk of reducing turns, leading to a loss of freshness and incurring shrinkage. Retailers with high store traffic take on less risk in adding more SKUs.
Many food retailers are effectively matching their produce strategy with their overall business model, which is leading to very different produce assortments in different stores, as shown in Exhibit 3.
Trader Joe’s and Costco have a limited-SKU and high-turn merchandising strategy, so they mostly stock fast-moving conventional products, but opportunistically shift to organics when consumers demand it.
Costco chooses organics when it can offer them at a minimal price premium, but will stick with conventional if the supply isn’t there. And Costco is also playing an active role in addressing these supply issues, directly investing with organic farmers to help them buy land to keep up with demand.
Meanwhile, Trader Joe’s focuses primarily on conventional produce, since it’s a secondary source of produce for most customers. With limited SKUs, Trader Joe’s typically has only a handful of SKUs of each type of fruit or vegetable, letting the retailer focus on freshness over variety. Among the few SKUs they offer per fruit or vegetable, the decision of organic or conventional is based on consumer demand.
Retailers with produce as a signature—think Sprouts or Whole Foods—deal with complexity by using a category-by-category approach to help them decide where to go deep with organics or their assortment.
Whole Foods manages SKU complexity by focusing primarily on organic offerings, thanks to its high-end positioning. The retailer carries conventional only when the organic supply isn’t competitive.
Whole Foods also limits SKUs by using select categories for major merchandising statements, like mushrooms, while limiting variety in categories like tomatoes.
In contrast, Whole Foods’ new 365 format offers more conventional fruit and vegetables—their assortment is only about 50% organic—that are smaller or less perfect compared to what’s on offer at traditional Whole Foods stores. This makes sense given that the new format is designed to hit a lower price point and address a wider range of consumers.
Conventional Grocers Commit to Organic, Specialty and Local
Leading conventional grocers like Kroger are making a huge commitment to organic and specialty produce to distinguish themselves from less-progressive mainstream grocers.
These head-of-the-pack conventional grocers typically merchandise organic products in their own sections of the produce aisle, letting them maintain a smaller amount of shelf space per organic SKU compared to conventional SKUs without consumers noticing a large discrepancy in space allocation—helping keep inventory levels low.
Kroger management noted during a 2014 analyst call that organic produce “continues to enjoy large sales growth.”7 This growth will likely only continue, especially thanks to a recent strategic partnership with Lucky’s Market, a specialty grocery chain focused on natural, organic and locally grown products with an indoor farmers market format.
Lower-end conventional grocers like Smart & Final and Food 4 Less (owned by Kroger) are sticking with conventional produce sets because demand for produce is lower, and for organics, it is even more so. Food 4 Less does have some organic SKUs, but they are typically all in one small section.
Even Walmart has found that their lower-income customer base has only limited interest in organics, as evidenced by the pullback of its Wild Oats brand, originally touted as a watershed moment that helped increase the accessibility of organic food by lowering prices. Instead, after disappointing sales, Walmart is adding more organic food to its Great Value private-label brand.
No matter their produce assortment strategy, grocers are also investing in their produce merchandising and pricing strategies to catch the eyes and wallets of their consumers. Sprouts was one of the first retailers to truly innovate the traditional grocery approach by putting produce at the center of its store and showcasing the products via signage, displays and storytelling.
For retailers and growers alike, changing consumer preferences are creating new opportunities to grab stomach share from other food retailers or even from CPG snack manufacturers. Those who fail to seize the moment will soon find themselves hungry for customers.
Triad Business Journal, 2015
The Packer, 2015
Lansing City Pulse, 2013
Chicago Tribune, 2015
Washington Post, 2016
Seeking Alpha, 2014