Food Retailers

What you'll learn to do: Categorize the wide-variety of food retailers

As you've seen in previous sections, the surge of retail channels and retailer formats selling food has had a tremendous effect upon grocery retailing. Yet the landscape promises even more change, as consumer behavior evolves in a connected, on-demand world. The next several sections will focus on the emerging factors that will further shape grocery retailing.

Changes in Food Retailing

Earlier we discussed how the most meaningful change in food retailing has been the growth of competitive channels, formats, and outlets. A wide array of retailers have included food items in their assortment because expanding their offerings increases purchases from customers. Furthermore, including food items might increase store traffic, either by drawing in new shoppers or getting them to return more frequently.

Let's revisit our example with the can of soup.

You can certainly find this item at your local grocery store or supermarket. But you can also buy it in bulk at a warehouse store like Costco. If you're out shopping at a mass merchandiser like Target, you'll still be able to find it. In fact, you might even be able to find the soup at your local Walgreen's or 7-11 store. Even if you don't want to leave home, you can order the soup online at Amazon.com and have it shipped directly to your doorstep.

So, you might ask, "Why doesn't every retailer expand their product assortment to meet all possible consumer needs?" Retailers shape their offerings to position themselves for a distinct target, differentiating themselves in-market. A critical element of this is providing the shopping experience their target customer values. In the context of groceries, a Wal-Mart superstore carries a slew of products and is a fine retail environment, but it's a decidedly different shopping experience than you get at a Kroger supermarket, which in turn is decidedly different than a shopping experience at Whole Foods, which in turn is a different shopping experience than you get at Dollar General.

Compare the store layout, assortment, pricing and service of a club store...	vs. a mass merchandiser...	vs. a traditional grocer
vs. retailer specializing in natural/organic foods...	vs. a dollar store

Thus, retailers aren't just competing with one another through the items they offer and the pricing they set. Instead, they're competing on a whole host of other criteria, including

• Convenience
  
  
  • Is the store nearby?
  • Is there ample parking?
  • Will they have what I need?
    
    
    • Is it likely that the item will be in stock?
    • Will I be able to find the item quickly?
    
    
    
  
  
  
• Customer Service
  
  
  • Is this a place I like to shop?
  • Is the store clean?
  • Are the staff available? Are they helpful?
  • Can I get in and out quickly?
    
    
    • Will there be enough cashiers working?
    • Is self-checkout offered?
    
    
    
  
  
  

As you can see, for many shoppers, the questions for the retailer aren't just "do you have it?" and "what does it cost?" Instead, shoppers are considering a number of factors that are based upon their individual needs. If you were just picking up milk on a Saturday afternoon, would you rather stop at a club store or go to the local grocery? How would that decision change if you were planning to shop for a two-week supply of groceries?

Groceries have moved to a whole host of other channels, where non-traditional formats use groceries to increase store traffic and revenue. Because the traditional grocery business operates on thin margins, sales volume is critically important to remain financially viable. Thus, this loss of sales to alternative channels is an important competitive threat. However, the loss doesn't imply that grocery stores and supermarkets are destined to decline. Instead, it's far more likely that their model will evolve to meet changing consumer needs. It is therefore critical that we understand these alternative formats and identify how we can most effectively compete with them, whether we're selling a simple can of soup or a unique customer experience.

Variety and Assortment of Goods in Food Retail

Let’s examine again how food retailers can vary from one another, considering assortment. Let's say you want to purchase a can of soup. How would you find the soup in each of the different stores? You might check a specific aisle or section of the store. How would this change if you were in a dollar store, a convenience store, or a warehouse club?

A category (such as soup) may be divided into several segments and sub-segments of soup (such as dry soup, chicken soup, or condensed soup). These segments can be further divided into brands (such as Campbell's Chicken Noodle Soup and Healthy Choice Chicken Noodle Soup) and then further divided into SKUs, or Stock Keeping Units.

• Typical segments and sub-segments for soup:
  
  
  • Dry soup section, such as ramen and mixes
  • Ingredients, such as bouillon
  • Ready-to-Serve (RTS) segment
  • Condensed, which can be further divided by
    
    
    • Ingredient
    • Meal, which can be further divided by:
      
      
      • w/o Protein
      • w/ Protein, e.g. Chicken or Beef
      
      
      
    
    
    
  
  
  
• Leading brands in the Ready-to-Serve segment:
  
  
  • Campbell's
  • Progresso
  • Amy's
  • Healthy Choice
  • Wolfgang Puck
  
  
  
• SKUs, which can number from single digits to dozens or more

It’s important to understand merchandise this way because retailers make assortment decisions at the category, segment, brand, and SKU level to target a distinct consumer or shopping occasion.

With this in mind, think about a non-traditional format like a Walgreen’s drug store. Do they have freezer space? How much? Are they able to carry ice cream, frozen pizza, frozen dinners, and frozen vegetables? If not, what do they exclude? When we consider their model and focus, we can understand how they make assortment and distribution decisions.

Consider Family Dollar, a dollar store. With low staffing levels and a focus on low costs, Family Dollar must consider how to reduce their risk of spoilage. Without large refrigerators or freezer space, they would not be able to stock a wide assortment of milk, eggs, fruits, vegetables, or meat.



A Sam’s Club warehouse, which has a limited assortment, will offer some products in the soup category. But they likely will not carry all segments, and they certainly will not carry most brands or SKUs. By comparison, a traditional grocer and mass merchandiser will have considerably more selection on-shelf. Again, these differences in assortment are important because they reflect one dimension of competitiveness for retailers—assortment.

However, there is a limit to how much differentiation the various retail formats will have from each other. A 10.75-oz can of Campbell's Condensed Tomato Soup is the same product at Target, Kroger, HEB, and everywhere else it is carried. A 21-oz box of General Mills' Cheerios is the same at Wal-Mart, Safeway, Food Lion, Mi Pueblo Food Centers, and every other store that stocks it.

(Note: In rare cases, some large retailers such Wal-Mart, Target, Sam's, and Costco have the clout to request unique items from manufacturers. However, these unique items are usually offered either in limited supply or for limited periods. These retailers are able to do this because of their scale and sales volume, which reduce costs and risk for the manufacturers.)

Current Trends in Food Retail

While the growth of channels and competitive outlets has had massive implications over the past twenty years, there are other significant factors influencing food retailing in the United States, including demographic changes, consumer demand for convenience and solutions, and cost pressure.

Specific to demographics, food retailing is being influenced by baby boomers, millennials, and the increasing cultural diversity within the country. This is reflected in the focus on fresh and local foods, the rise of ethnic foods and flavors, the mainstreaming of natural and organic products, nutrition and health credentials, and single-serve and portion control.

The Rise of Healthy Food

In an effort to manage general health, many baby boomers have become more focused on diet and the role that food plays in managing wellness. As a result, manufacturers have responded by improving the health credentials of their items. This often manifests in avoidance trends such as sugar-free, fat-free and low-sodium products. For growers, producers, and retailers, this trend has also been reflected in increased consumption of fresh and local foods, primarily produce, but also extended to meat, fish, and poultry.

Millennials have also demanded a focus on fresh and local foods. Their interests lie in both a demand for authenticity and a desire to reduce the environmental impact of commercial food production. This, coupled with higher health credentials, is also at the core of the mainstreaming of natural and organic foods. Boomers and millennials in particular reflect a belief that natural and organic foods are both “better for you and better for the environment.”

Single Living Through Food

The smaller households of boomers and millennials, who have put off life events like marriage, parenthood, and home ownership to later ages, compared with previous generations, mean that large pack sizes do not suit their lifestyles. Instead, these smaller households want a smaller pack size and flexible packaging more suitable for households of 1–3 members. Smaller households also want items that are resealable so they can be put away for a later use.

Diversity in Food

Cultural changes within the country mean that the food and flavor variety the general public demands is broadening. While we can already see some changes to the assortment of products offered, we should expect this diversity to influence the shopping environment as well. For example, a lot of in-store signage and product packaging are evolving to be multilingual, dependent upon the demographics of the community. Imagery is also changing to reflect multiple cultures. Retailers and their associates need to understand the customs of different groups within their communities, such as halal or kosher restrictions on food handling.

The Future Is Convenient

Consumers’ demands for convenience and solutions also promise changes to the food retail industry. Of course, this is not new. In fact, these same demands have been at the heart of nearly every innovation we’ve seen in the industry for the past 60+ years. However, the rise of technology, which encourages consumers to be online, engaged, and connected without interruption, has increased what kind of service is possible and elevated expectations.

A few decades ago during the first dotcom bubble, a host of start-ups worked hard to master grocery delivery. More recently, Amazon has raised the stakes, developing a distribution network that promises two-day delivery for most items, including sundries. They are also expanding into grocery delivery. Amazon’s acquisition of Whole Foods in late 2017 sent a very clear message that it was serious about winning in the grocery space.

Amazon is not the only one acquiring companies like Whole Foods. Wal-Mart's purchased of Jet.com and InstaCart's partnerships across several retailers also foreshadow that the future of retailing may not include a shopper’s trip to the store. Instead, grocery shopping for the average consumer may include only a mobile app, a stored credit card number, and a delivery charge.

In addition, consumers’ need for solutions has also contributed to the rise of subscription services that offer at-home delivery. Boxed.com delivers an assortment of household items, including groceries. HelloFresh, Blue Apron, and Plated deliver meal kits with pre-measured ingredients and full instructions for at-home preparation. Companies like Munchery go a step further, delivering chilled meals, which can be heated and served. Note, of course, that all these solutions remove a shopping trip and bring the product directly to the consumer’s home. Many consumers are willing to pay a premium for such conveniences.

Home Automation

In addition to increasing online grocery sales, home automation in which appliances can communicate is also impacting the way people shop for food. Already, Amazon Echo is in more than 20 million homes, while Google Home is in more than 4.6 million homes.^[2] We are clearly moving toward a world where a replacement can of soup, box of cereal, or gallon of milk requires only “Alexa, order…”

Cost Pressure

Cost pressure and how it relates to labor is also affecting the industry. Wage inflation, while positive for associates, is a real concern. In light of fragmenting channels and the continued rise of online sales, both of which make brick and mortar stores less efficient, higher wages threaten to shift cost structures negatively. Expect continued efforts by large companies to reduce labor costs, either through automation with tools like self-check lanes or through expanded job roles where two associates will do the work of three.

Demographic changes within the country, consumers’ demand for convenience and continued cost pressure, along with continued channel blurring, are the most significant factors facing the food retail industry. Their effects can be seen in everything from the rise of fresh and healthy products to a broadening of ethnic offerings to new grocery delivery initiatives and efforts to control in-store labor costs. These trends promise to influence the industry for years to come.

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