CREJ - Retail Properties Quarterly - November 18, 2015
Shopping for groceries was much simpler 45 years ago. Grocery stores were 20,000 to 25,000 square feet, which allowed stores to offer a variety of products, but only sold groceries, meat and produce. For example, let’s say you want to buy peas. Your choices were simple – you bought fresh, frozen or canned peas. Items were easier to find, and shopping at your small neighborhood store wasn’t as physically demanding or confusing as shopping in the large megastores we have today. Unfortunately nothing stays constant in our society, including grocery store formats. While some changes benefit society, such as the technological advances that make it easier to communicate, other changes cause more problems than they solve. Grocery stores are a prime example of the latter because the changes implemented confused consumers about what was the store’s purpose. Telephones changed, but their purpose didn’t. No matter the form – from rotary dialing landline phones to pagers to cell phones and voice over IP – at its core, it is still a way to communicate. Grocery stores decided to reinvent themselves and, in doing so, forgot what was their primary purpose – to offer conveniently located stores close to their customers to sell food to eat or prepare for home consumption. Over time, selling food became less important and selling more of everything became the way to defeat the competition. Selling everything meant stores had to become larger to accommodate these additional nontraditional food products, which were traditionally sold in drug and discount stores. This led to new store formats that added departments like pharmacies, health and beauty aids, pet food, service meat, delis, bakeries, salad and sushi bars, pizza, sandwiches, Chinese food and other prepared foods, as well as coffee and juice kiosks with seating areas with plush seating and fireplaces. In addition, stores added childcare areas, in-store banks, dry cleaners, floral departments, and beer, wine and liquor departments. All these new departments did not fit in the old 25,000-sf store format. So, store footprints increased. These larger stores drove out the weaker competitors, which could not afford to build larger stores. Many of these stores were closed or bought by the larger chains. The independent stores were virtually eliminated. This shift caused a redistribution of grocery store square footage and a reduction in the number of stores. Although these changes did not significantly increase the amount of square footage, the individual store sales increased and all was good in the grocery store land of Oz. New Competition
The chicken-and-egg question grocers have struggled with is whether the larger store format that sells a variety of items increases profits. Or put another way, does building a bigger store in order to accommodate and sell more of everything increase the bottom line? There doesn’t seem to be a answer to this yet, so in the meantime, we have conventional stores that range in size from 50,000 to 120,000 sf. All seemed peaceful with these ranging sizes in the grocery land of Oz, until the wicked witches of new competition began to disrupt the system. New competition like Whole Foods, Sprouts and Trader Joes focus on selling food only, which flies in the face of the selleverything model. The Oz grocers lack the scarecrow, who hasn’t got its brain yet, and that’s why the grocery industry is unable to decide the right format to use to win the grocery wars. The war got worse when discount stores began adding food departments. Drug stores fought back by adding food. And convenience stores became coffee, Slurpee and junk food havens. In response, the conventional supermarkets began selling an even larger variety of products. Meanwhile stores like Whole Foods, aka whole paycheck, developed almost a cult-like following. Eventually, like all love affairs, the consumer fell out of love with Whole Foods when many realized that they could eat at a restaurant for less than buying the prepared foods. In turn, Whole Foods realized that customers still liked to “squeeze the Charmin,” drink coke and eat junk food – all of which they didn’t sell. Therefore, Whole Foods downsized its stores, reduced its variety, lowered its prices and announced a new, smaller Whole Foods express store, which may be a noteworthy new format. Similarly, the discount stores realized selling everything didn’t necessarily mean an increase in sales and profits. Target sold its pharmacies to CVS and is not building Super Targets anymore. Likewise, Walmart is building more neighborhood supermarkets. Today, conventional supermarkets are focused on acquiring other chains or closing unprofitable or outdated stores. Kroger is building larger store that are between 100,000 to 120,000 sf, and adding more departments that sell products commonly found in discount stores. Albertsons, with the addition of Safeway, hasn’t built any new stores in the past 10 years, but has closed stores – a confusing strategy to gain market share and win the grocery war. If Albertsons does become a publicly owned company again, it might focus on a long-term strategy of operating both brands in the same market and experiment with alternative formats. For example, Albertsons, which carries more nonfood items, could become a store that sells only nonperishable products, only carries national brands and features a pharmacy. Safeway could concentrate on perishable products and private label groceries. This would give Albertsons the best of all worlds – selling everything and offering the consumer the choice of convenience and an easier shopping experience, depending on their shopping needs. This format concept could be tested easily where Albertson and Safeway have existing stores close together. Taking out my crystal ball, which I’m sure you can buy at any of the major sell-everything grocery stores, I see the confusion continuing. For chains like King Soopers and Albertsons, that have a large number of existing and prototypical stores, it will be difficult and costly. Safeway discovered this when it did an extensive lifestyle remodel that wasn’t as successful as it hoped. King Soopers will continue to try to build larger stores, but I don’t think that is the ultimate format either. In the future, I hope to write another article focusing more of a “Steven Hawkins analysis” of why the theory of selling everything doesn’t work. If I’m not asked to write any additional articles, at least I can tell you that stores always locate the peas in the vegetable section – now trying to find out where the vegetable section is will be the challenge.