What’s the Future of the Middle?
Traditional
supermarkets are caught in the middle – between the high-margin,
high-growth premium food retailers like Whole Foods Market and the
low-margin, high-growth discounters like Wal-Mart and Target.
Wal-Mart is now
the number one grocer in the U.S., with an estimated $80 billion in
annual supermarket sales. Since 2000, Wal-Mart has added more than
1,000 “Super Centers” selling groceries. Whole Foods has doubled its
revenue during this period, and had sales of $5 billion in 2005. In
2005 alone, Whole Foods’ sales increased 22 percent.
The sales gains
at Wal-Mart and Whole Foods come at the expense of operators in the
“grocery middle.” This group is now composed of many brands owned by a
few large food companies like the Dutch company Ahold and US-based
Kroger. Many of these companies were once innovators – after all, they
pioneered the supermarket concept in the 1950s. For three generations
of shoppers, these companies have refined the supermarket and made it
work. Now they’ve got pressure on both sides, and they must either
change or risk extinction.
Consider
Albertson’s, which was the second largest grocery chain in the US.
After several years of poor performance, with profits declining in three
of the past four years, the company agreed to be purchased by a
consortium led by Supervalu in June 2006.
Safeway believes
it can prosper in the middle, providing higher quality than Wal-Mart
with a wider range of products than upscale stores like Whole Foods.
Fitting in this “new middle” required
making significant changes, first in its operations, and then in its
advertising. Starting in 2003, the company committed to spending $1.6
billion a year over six years to remodel all of its 1775 stores. It
upgraded the quality of its meats and produce, and banished fluorescent
lighting and white paint. As a result, the stores have softer colors
and higher quality.
This effort
appears to be paying off. In 2005, same-store sales growth was at 4.3
percent year over year, compared to a same-store sales decline of -4.5
percent in 2003. Safeway stock is up 31 percent in the last 12 months,
to $31 a share, according to an 18 Sep 06 article in BusinessWeek.
The recent stock performance handily beats both Whole Foods (which
is down 22 percent in the last 12 months) and Wal-Mart (up 9 percent).
Other
supermarkets are using technology to add unique products or approaches,
attributes that are difficult for competitors to imitate.
UK-based
Sainsbury’s, for example, has employed new technology to make popular
products
available even in off-seasons. Partnering with produce growers,
Sainsbury’s uses special lighting and heated glasshouses to offer
consumers sweet English strawberries,
a favorite
treat, beyond their normal harvesting period.
Some stores are
communicating with their shoppers in real-time. Stop & Shop, a division
of Dutch giant Ahold, is working with IBM and software vendor Cuesol to
test high-tech shopping carts that can give coupons and product news to
shoppers as they stroll the aisles.
The “shopping buddy” at Stop & Shop
The
grocery middle must continue to innovate. The next five years will
determine which supermarkets can compete effectively against the
competition from both the Whole Foods and the Wal-Marts of the world.
More
Information:
-
BusinessWeek’s
recent article on Safeway’s redo is available to subscribers
here.
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For more on
the shopping buddy, go
here.
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Here’s a
survey on new innovations in supermarkets.
