Behind a fresh wave of sector consolidation and a sharp new focus on the consumer, American supermarkets are in many respects as strong as they have ever been. But as the supermarket industry squares off against itself — and against a rival host of physical and virtual alternatives — the rapid changes of recent years may only just be starting, observers say. As one has put it, the supermarket as a model will endure, but only those chains that dare to evolve will survive. “If you’re not great, it’s very tough out there,” said David J. Livingston, founder of DJL Research, a Pewaukee, Wis.–based consulting firm.
The supermarket’s resilience is rooted in a few basic truths: In good times and bad, people need to eat, and more often than not, they prefer to buy food in close proximity to home. Survival, however, requires retailers to operate efficiently and price competitively, and to respond to changes in what customers want to eat and how they want to shop. This consumer-centric mantra, adopted by many of the best supermarkets today, may hark back to a revolution sparked by The Kroger Co., which many view as the first U.S. chain to convert a loyalty card from a glorified discount vehicle to a data trove driving personalization and differentiation.
In the early 2000s, with the help of British loyalty-data firm Dunnhumby, Kroger gained new insight into its consumer base, slashed internal costs and invested the savings in lowering prices. The move took margins down too but sparked a remarkable cycle of quarterly same-store sales improvements that had reached 50 quarters — 12 and a half years — through August.
But Kroger invested in more than just prices. Its customer-first strategy made allowances for funding such customer-friendly innovations as technology that reduced wait times at checkout. The company adapted its assortments to align with consumer demand for healthy, natural and organic foods, guided in large part by customer data. A sophisticated program of personalized discount offers based on customer shopping habits continues to drive sales increases among Kroger’s loyal households, company officials say.
What Kroger proved was that it was not enough for today’s supermarkets simply to be cheaper; they also needed to be fresher, friendlier and more convenient. Food stores of all stripes are attempting some version of the same comprehensive play today, and those that might excel in one area but not in another — Whole Foods and Walmart, to name two — have stumbled in recent years. Whole Foods tapped into a lucrative consumer hunger for fresh and natural/organic foods, but a poor reputation for price and for a complicated shopping experience sent executives back to the drawing board a year ago. The result is a new concept called 365 by Whole Foods Market — which serves up high-quality foods in a smaller, simpler, less expensive setting. The first two of these, in Los Angeles and Seattle, utilize less labor (most of the meats are prepacked and not cut in-store; fruits are priced by item and not per pound), feature tighter assortments with greater emphasis on lower-cost private brands, and leave the merchandising pizzazz to partners such as co-located restaurants and self-service kiosks.
Early results suggest that 365 is a winner. Whole Foods Co-CEO John Mackey said in a presentation this past summer that customer reception to the Los Angeles 365 store, which opened in May, was so strong that officials have already reconfigured the store’s checkouts to process large orders better. “We didn’t have conveyor belts, because we were expecting with a smaller store and a curated mix that we’d get a lot more kind of smaller baskets,” Mackey told investors. “But that’s been the opposite. We’re getting bigger baskets than we traditionally get at Whole Foods.” Executives have said that some of the conventional Whole Foods stores that are now in the pipeline may in fact open under the 365 brand instead.
Meanwhile, Walmart discovered that its traditional emphasis on efficiency and low prices harmed the ambience and quality of its food stores. To fix this, the company brought in Greg Foran as CEO. Foran, a New Zealander and a veteran of Australia’s Woolworths chain, embarked on a comprehensive makeover. Development of new stores was slowed, while hundreds of existing stores were closed, including all outlets of the Walmart Express format. Employees got raises. Supercenters and the Walmart Neighborhood Market grocery/drug concept are remerchandising behind fresh food, cleaner displays and more-distinct offerings.
And after two years of investing internally, Walmart has resumed strategic price reductions with a view toward accelerating modest gains in same-store sales and store traffic, and as a means of heading off competition from a growing discount segment.
Kroger’s influence has also prompted a more active merger-and-acquisition environment in food retailing, the likes of which have not been seen since the late 1990s. Kroger purchased upscale North Carolina regional grocer Harris Teeter in 2014 and then acquired Milwaukee-based Roundy’s Supermarkets, parent of Chicago’s well-regarded Mariano’s Fresh Market. European retailers Ahold and Delhaize have combined to create a 2,000-store, East Coast–based chain that operates the Food Lion, Giant, Hannaford and Stop & Shop brands. And Albertsons, backed by Cerberus Capital and real estate interests that include Kimco Realty Corp., bought back the former American Stores chains it once had sold to distributor Supervalu and, in a separate deal, added the assets of Safeway. Today Albertsons operates 2,000 stores.
Like Kroger, the newly named Ahold Delhaize has been using shopper data to ascertain consumer preferences and then using that information to make certain improvements, including lower everyday prices, more-elaborate fresh departments and exclusive private-label foods, according to company officials. The merger, completed in July, is expected to unleash millions in synergy savings and greater economies of scale.
Consolidation is also effectively reducing some industry capacity and spotlighting those companies that lack the financial and operational firepower to compete. Northeast stalwart A&P, once the largest food store in the country, collapsed under its second Chapter 11 filing last year. Many of its stores were divided among such competitors as Ahold, Albertsons and Wakefern Food Corp., the New Jersey–based cooperative wholesaler whose independent members operate ShopRite stores.
The future looks even more competitive, observers say. German-based retailer Lidl, a division of The Schwarz Group, has targeted the mid-Atlantic to make a U.S. arrival no later than 2018. Lidl is often compared to fellow German limited assortment discounter Aldi. Between them, Aldi and Lidl have proved a nightmare for conventional food stores in Europe. Aldi has been operating in the U.S. since the 1970s, but only recently has pivoted from a focus on the neediest shoppers in its markets to an appeal for customers across all economic classes. It offers an assortment reflecting only the 1,500 most essential items in a conventional store, including such trendy items as gluten-free and organic merchandise. That assortment is made up almost entirely of exclusive brands and is supported by a relentless focus on efficiency. There are no service counters at Aldi, and there is no decorating of cakes — only market-leading prices.
The limited-assortment channel represented approximately 3 percent of the overall U.S. food market in 2015 — penetration levels far below those in Canada and in Europe — and was projected to grow by 8 percent annually, according to Long Grove, Ill.–based Willard Bishop Consulting. This is the opportunity that companies like Aldi and Lidl are seeing, along with U.S.-based discounters such as Save-A-Lot and Grocery Outlet.