When Hy-Vee Inc. opened a new 96,000-square-foot store in the Des Moines suburb of Urbandale, Iowa, last year, one of the most dramatic changes was the addition of a bar and full-service restaurant called the Market Grille.
With a wait staff and menu offering appetizers to steaks, the eatery opens at 4 p.m. and is an extension of the chain's established self-service dining area, says Ruth Comer, Hy-Vee assistant vice president for media relations.
"We had done well with our in-store [self-service] breakfast and lunch business" but not so well at night, says Comer. The switch has bolstered evening dining. "For some people, it's a destination restaurant," she says.
Pushed by changing shopper preferences, encroachment by nonfood retailers and a splintering of grocers into specializations to serve specific needs or customer segments, supermarket chains across the United States are turning to a variety of new concepts to differentiate themselves, attract customers and boost sales.
Many major players now operate multiple store formats, from convenience to superstores, in additional to traditional banners. Cincinnati-based Kroger's proposed purchase of Matthews, N.C.-based Harris Teeter Supermarkets, a 212-store chain based in the Southeast, would allow the Ohio giant to learn the Southern firm's "click and collect" Internet business, a format many believe vital to the future.
The average customer visits two to four stores per week, so "smart grocers are figuring how best to serve the customers whether they like a store with 40, 50 or 60,000 SKUs or one with 10,000 SKUs," says Thom Blischok, senior executive advisor for Booz & Co. in San Francisco, which collaborated with the Food Marketing Institute on the 2012 Shopper Trends report.
Booz & Co.
With family size shrinking, households require smaller pantries and fewer stock-up trips to the grocery. Instead, two of the strongest drivers for shoppers are convenience and freshness, Blischok says.
Fast-growing Aldi, for example, makes it easy and convenient for a shopper to get in and out of the store, Blischok says. It is one of the top banners for customer satisfaction, according to a July study by Louisville, Colo.-based Market Force Information, where it scored first for having accurate pricing and tags.
Aldi keeps overhead low in its 12,000- to 15,000-square-foot stores by stocking fewer than 3,000 SKUs in a warehouselike design and employing fewer than 10 full-time workers per store, says Jim Hertel, managing partner at Willard Bishop, a Barrington, Ill.-based strategic consulting firm.
Aldi's stripped down approach means it can build a new suburban store, excluding the cost of real estate, for about $125 a square foot, or less than $2 million, while refurbishing an existing property can be done for $1 million, says Chuck Taylor, director of operations for Englewood Construction, a Chicago-area commercial builder. Those costs are half of what it takes to build a flagship for a high-end specialty grocery like Whole Foods Market, Taylor says.
Traditional supermarkets can boost sales and improve navigation by pulling products into shopper-friendly departments, such as a holistic pet center, infant food and care, and health and wellness, Blischok says. Supermarket companies must commit to making current stores simpler and more time effective for customers.
Many future locations will be urban stores. Trader Joe's is among the retailers following the growth of apartment and condo buildings in cities. Although the housing market is rebounding, urban areas have attracted higher-income consumers and a growing number of retailers are honing in on them. Walmart, for example, opened 12 of its 38,000-square-foot Neighborhood Market stores in one day in the second quarter, ended July 31, more than in any previous period, the company says.
The company operates 290 Neighborhood Markets with in-store pharmacies. Walmart achieved strong double-digit growth at small-format Express stores open more than one year, executives said on a recent conference call. The 26 Express units, each 15,000 square feet, are designed for urban sites or small rural communities.
Milwaukee-based Roundy's Supermarkets Inc., which entered the Chicago metro market in 2010 with a new division called Mariano's, has 11 stores currently and two more planned by year-end. It is appealing to an upper-middle-class clientele, says consultant Ben Ball, senior vice president of Dechert-Hampe & Co. in Northbrook, Ill. He says it combines two fast-growing retail trends: the fresh meat, prepared food and organic perimeter similar to a Whole Foods Market format and the low-cost, value-oriented dry goods at the center of a traditional supermarket.
The 30,000- to 40,000-square-foot stores have a café with authentic Italian coffee and gelato, smoothies, sushi, soup, salad bars and a wine wall. In addition, they offer an extensive assortment of prepared foods in the bakery and deli so that shoppers can eat in the store, take home a meal or buy ingredients. Roundy's CEO Bob Mariano, who is the former CEO of the Dominick's banner now owned by Safeway, told the Chicago Tribune in February the stores "are designed to blur the line between shopping and dining."
Although Roundy's net sales for the second-quarter ended June 29, 2013, dipped 1.7 percent, the Mariano's banner had average weekly net sales of slightly more than $1 million.
While the prospect of breaking into new markets with a new format can be daunting, it becomes more enticing when a retailer has existing profitable stores in the market but "a lot of dark real estate in the area in between" locations, Hertel says. Opening a small-format location between existing stores could generate new revenue without cannibalizing existing stores. "For a lot of guys, this is fitting a store in the cracks in their market," he says.
But for many players, Hertel says, "The bigger question is coming up with the right concept." A deep dive into data gathered from point of sale and vendors can help uncover growth opportunities in a crowded field and pinpoint the type of format likely to be successful in a given location, says Tim McGuire, senior partner and head of McKinsey & Co.'s Consumer Marketing Analytics Center in Toronto. "A whole bunch of [concepts] are working out there," he says.
Canadian retail giant Loblaw Cos. Ltd. began testing a new 10,000-square-foot urban discount pilot in May in Calgary, Alberta. The store, called The Box by No Frills, is a smaller version of the company's No Frills discount division and offers a limited selection of merchandise at everyday low prices. Loblaw is readying another pilot aimed at the fresh-food and health-conscious shopper. It's scheduled to open in downtown Toronto this fall, according to the Toronto Register and Mail.
McKinsey & Co.
"The magic is in coming up with something different," says McGuire. How much to spend in executive time and company funds is driven "by an assessment of what you have and how big the opportunity and how big the threat [from competitors] I am facing."
Funding the Future
Since a new format generally takes three years from concept to implementation, Blischok says, most companies will pay for development from existing operating budgets. "You can't fund the future by spending the same way you do today," he says. "Stores have fixed costs and variable costs. The bottom 15 to 20 percent of those costs–those beyond fixed costs–have to come under severe scrutiny," he says. Retailers might decide to cut back spending on those programs or costs to reinvest in technology or additional store locations.
Whatever the concept, "the key is still location," says Garrick Brown, research director for Cassidy Turley in San Francisco. Rebounding commercial real estate in growth markets means retailers will find few deals for quality urban locations. Premium space in top markets can command $48 a square foot on an annual basis for up to 20,000 square feet, and $42 per square foot for properties of 40,000 square feet or more, he says.
Rents are half that in "good," second-tier markets such as Oakland, Calif., but getting the best and most convenient sites, whatever the size, is still crucial, Brown stresses.
In some cases, retailers can capitalize on existing locations by rethinking the format. Lakeland, Fla.-based Publix has converted several outlets to Publix Sabor stores, which "have done really, really well," Brown says. Besides standard Publix goods, the format offers a large variety of products from the Caribbean and Central and South America, reflecting the demographics of the area around the stores.
"At the end of the day, it is about convenience" when choosing a new location, says Brown. Unless a retailer has customers with the "insane loyalty" of Trader Joe's and Whole Foods, most shoppers even for consumers in frugal mode will not detour to a secondary location, he says. Too often retailers miss the best locations because they are too rigid about space requirements "whatever the template."
One retailer avoiding this mistake is Whole Foods. While typically the company has had units around 37,000 square feet, company officials said in a third-quarter conference call that going forward the goal is to "right size the store for the community."
In the Boston area, for example, it has plans for an 8,000-square-foot store and one as big as 50,000 square feet. The company's new 26,000-square-foot store in downtown Detroit is generating double the results expected despite being in an area with few core customers. The response is giving the company the confidence to pursue new markets and formats previously not considered.