The Insider: Heard on the Street
[ Fresh & Easy Buzz's The Insider columnist departs a bit today from his usual column format to offer some analysis and commentary on the growth of the discount food and grocery retailing segment in the United States, the rush to create new price-focused, discount grocery formats, and the proliferation of new stores by existing discount segment grocery retailers.]
The price-focused discount food and grocery retailing segment and number of discount format stores in the U.S. is growing like topsy.
Exhibit A: Supervalu, Inc. the third-largest traditional supermarket chain and fourth-largest retailer of food and groceries in the U.S., says it's doubling the number of its hard-discount Sav-A-Lot stores over the next five years, from about 1,200 currently to about 2,400, including opening 100 new Sav-A-Lot units this year.
Then there's Aldi USA, the American division of Germany's Aldi International, the global hard-discount grocery retailing company. Aldi USA is opening about 100 new stores as well this year, including a few dozen in its newest market of Texas, which it entered in late 2009. Aldi USA opened around 100 new units in 2009.
In the Western U.S., Idaho-based Winco Foods, which is an every-day-low-price (EDLP) supermarket chain operating stores in the 90,000-1000,000 square-foot range, is opening numerous new stores in the Western U.S. and plans to enter Arizona with multiple stores in the near future.
Last - but far from least - is the EDLP discounter from Bentonville, Walmart Stores, Inc. Walmart continues to open new supercenters, convert existing discount stores into combination food-grocery and general merchandise supercenters, and locate smaller, hybrid supercenters, like the one it opened in Modesto, California in 2008, in vacant buildings in the 70,000 -to- 100,000-plus square-foot range, as it can find them. For example, It currently has two such hybrid supercenters planned for Southern California in vacant buildings of about 75,000 -to- 80,000 square-feet.
The brawny retail brawler from Bentonville also continues to test various small and smaller-format food and grocery stores, including its Marketside by Walmart, Neighborhood Market (and Neighborhood Market by Walmart), Supermercado de Walmart (Hispanic format supermarket), along with its combination grocery and general merchandise Latino consumer-focused supercenter and club store formats.
Exhibit B: Next there's the fast-growing dollar-store discount format. Most dollar-store retailers offer a substantial selection of packaged food and grocery products in their stores. And some, like the Southern California-based 99 Cents Only chain, devote about 50% of store square-footage to food and grocery items, including fresh meats, produce and other perishables.
Dollar General Corp., the largest U.S. dollar store format chain with more than 8,800 outlets in 35 states, plans to open a whopping 600 new stores this year.
Additionally, Family Dollar, which has about 6,600 locations in the U.S., says its adding about 200 stores this year. Family Dollar has been increasing the amount of square footage it devotes to food and grocery items in its stores over the last year. [Suggested reading - April 15, 2009: Family Dollar Discount Store Chain Increasing Amount of Store Square Footage Devoted to Merchandising Food-Grocery Items in Stores Beginning in May] The retailer's percentage of sales from consumables has increased significantly since the recession began.
And not to be outdone, Dollar Tree, which has 3,800 U.S. locations, says it too is opening around 200 new stores in 2010.
Lastly, the earlier mentioned Southern California-based 99 Cents Only dollar format chain is also in expansion mode, opening numerous new units this year and entering new markets such as Northern California, where it opened its first store in 2009, and has plans for many stores over the next couple years.
Exhibit C: The disount segment is getting new entrants. New discount food and grocery store formats are popping up all over. For example, Texas grocer H-E-B opened it's discount store prototype store, Joe V's Smart Shop, in Houston, Texas on May 5. If Trader Joe's has its way the Joe V's name won't last long. But it's the format, not the name, The Insider is concerned with today.
Additionally, on Thursday (May 13) the Giant Eagle supermarket chain, which is based in Cincinnati, Ohio, opened the first two stores of its new Value King no frills, discount store format. The two stores, which are about 27,000 square-feet, are located in Pataskala and Reynoldsburg, Ohio. More units are on the way.
Like Aldi and Save-A-Lot, Giant Eagle's Valu King format is limited assortment. The stores carrying about 3,000 SKUs. And like the two hard-discount grocers, Valu King is all about low prices.
Southern California-based Smart & Final is also getting into the discount format grocery retailing business. This summer is will open five SmartCo Foods supermarkets, a new format for the retailer, in the Metro Denver, Colorado market region. Plans call for numerous additional units in the state. The first five stores will all be in former Albertsons supermarkets.
According to Smart & Final, the SmartCo Foods format combines the features of a supermarket, warehouse club store and farmers market, with a focus on price and value.
The retailer operates Smart & Final banner non-membership warehouse stores, cash & carry stores, small supermarkets called Smart & Final Extra and the Henry's Farmers Market chain, so the synergies are certainly there to combine those formats into one. Whether it will be a success or not is another question, as is always the case. Combining the various formats under one roof into a single format could be a powerful combination if done well. Doing so also appears to offer a strategy beyond just price. The SmartCo Foods stores are about 30,000 -to- 40,000 square feet.
Numerous other grocers are looking at and working on discount grocery store formats. Discount seems to be today what the upscale format was in the U.S. from the early 1990's -to- the early 2000's in terms of focus and ubiquity. You might call that era "upscaletopia."
If you multiply the square-footage of just the new discount stores The Insider has mentioned so far, it adds up to millions of new discount food and grocery retail square-footage in the U.S. over this year and next.
The sixty four thousand dollar question (well, one million dollar question, indexed for inflation) is: 'Can all of this additional discount grocery square footage be absorbed in the U.S.?'
The Insider isn't sure it can be. After all, this collective discount store growth was hatched in the midst of a recession. While I believe frugality in grocery shopping will be with us for another couple years at least, and perhaps to a limited extent become a longer-term trend, we're already seeing many wealthier and perhaps not so wealthy consumers turning back to higher-end grocers for at least some of their food and grocery shopping. For example, Whole Foods Market reported last week it doubled its net income for its fiscal year second quarter over last year.
As the economy improves, particularly employment and consumer confidence, The Insider thinks the trend towards more shopper dollars going to higher-end grocers will increase even more so. I don't expect a rapid return to upscale store grocery shopping like we've seen in past recessions; this one is too long and to deep. But we will see a return to a noticeable degree, none-the-less.
With all the new discount retail grocery square-footage coming on line don't be surprised if come about mid-2012 we don't see some of the discount operators face a crisis of sorts similar to and the converse of what many supermarket and upscale grocers have been facing for the last few years, mainly an over-saturation of discount format square-footage for what the current, recessionary market will bear.
When unemployment is back to say seven percent or so and consumer confidence is much higher - let's say by early 2011 if the gods are with us - might we not see a significant flight from discounters to more mainstream supermarkets and upscale operators, just at the time when so much of this new discount grocery square-footage is online in the form of existing operators opening new stores and in new stores created by the numerous grocers now introducing their discount prototypes?
Of course, many economists and analysts believe the U.S. is in the midst of a trend towards becoming an overall poorer country in terms of average income. And, unfortunately, there are numerous statistics that suggest this might be the case. In many ways, the retailers bringing all this discount grocery square-footage on the market are betting on this trend, consciously or unconsciously. And if it is true, they might have a winning hand.
But The Insider has seen format trends on fast-forward before, and can't help thinking that's what might be happening when it comes to the discount segment. For the last three years it's been the winning format in U.S. food retailing. As such, just like when one sees winning trends in other walks of life, it's tempting to jump on the one that's currently performing best and ride it, both because you think it could work, but also because you fear if you don't your competition, who operates a discount format, just might eat your lunch. Just like basketball, grocery retailing requires both offense and defense, after all.
Ironically, The Insider believes one state where opportunity does strongly exist for additional hard-discount grocers is California, specifically in some regions of Southern California like the Inland Empire, Los Angeles and a couple others, along with in the Central Valley, from Bakersfield south to Fresno, and into the Northern Valley to Stockton, then on up to the Sacramento region.
Aldi has no presence in California. And Supervalu, Inc. has just a handful of its Sav-A-Lot stores in the state - a couple in Southern California and a couple in the southern Central Valley.
Further, Walmart has a minimal food and grocery retailing presence in these California regions, which is something the mega-retailer is working hard to change.
Winco Foods is putting a major effort in opening new stores in Southern California, the Central Valley and in the Sacramento area, but at present has only a handful of its 74 stores are located in these regions.
The main price-focused discounters in these three regions of California are big box warehouse chains and independents like Food 4 Less (Southern California and the Central Valley), Save Mart's FoodMaxx (Central Valley and Sacramento region) and a few others. These grocers by and large do well in the discount niche, and of course there are other competitors like supermarkets, mass merchandisers and club stores (and those dollar format stores) going after the discount shoppers food and grocery dollar. But I do see an opportunity for hard-discount format grocers like Aldi, Sav-A-Lot and others to open some stores in these regions - and do well. Store location is key, of course.
The Insider thinks there's also an opportunity for a couple existing , local supermarket chain operators in these California market regions to create smaller-format (under 50,000 square-feet) discount stores. I'll be addressing that concept specifically in a future column.
From a retail format and merchandising perspective, Tesco's Fresh & Easy Neighborhood Market stores have one foot (or perhaps aisle is a better metaphor) in the discount grocery segment, a second aisle in the fresh, prepared foods segment, a third in the Trader Joe's-like niche, and a fourth aisle in the mini-Whole Foods Market niche. So far this hybrid merchandising approach under one roof as a format hasn't shown success. There's still time for it to do so of course. Low price, both everyday and via promotions and store coupons, is s key focus across all categories at Fresh & Easy though.
The Insider's overall bottom line: Once the recession ends and unemployment starts coming down in the U.S., grocers that have an exclusive or majority price focus will need to have a post-recession strategy in place that includes other elements of merchandising for two reasons. First, with all the new discount food and grocery square-footage coming on the market, competition in the segment will be even stiffer than it is now. Second, as the economy and consumer confidence continue to improve, more and more shoppers will take some of their food and grocery dollars back to higher-end grocers. We're already seeing signs of this with last week's Whole Foods Market numbers and yesterday's first quarter report from Walmart, which saw a slight drop in same-store-sales for its U.S. stores. The retailer even attributed it in part to wealthier shoppers who've been shopping Walmart in the recession trading up and returning to higher-end chains like Target and others.
Shopper frugality is going to be with us for sometime. However, there's also a pent-up desire among consumers to splurge a bit. As the economy improves I see that desire being fulfilled to a certain extent at the expense of grocers that focus only on price.
When it comes to retailing in general, and particularly food and grocery retailing, focusing on price is actually the easiest thing to do from a merchandising, although not a profitability, standpoint. But if a retailer focuses too exclusively and for too long on just price at the expense of the other merchandising elements its retailing skills can get a bit rusty.
Shopper frugality is going to be with us plenty longer. But there's also a pent-up desire among consumers to splurge a bit, including on food and groceries. For example, the talented, savvy and observant east coast independent grocer Stew Leonard Jr. said this week his customers are doing just that, sighting as one example a substantial increase in sales of high-end cheeses at his four high-volume Stew Leonard's supermarkets. As the economy improves, this trading up by shoppers, combined with all the new discount grocery retail square-footage being added in the U.S., could pose a big challenge for those retailers with all or most of their focus in the discount segment.
[The Insider's Heard on the Street column is a regular - weekly -to- fortnightly (every two weeks for the non-bilingual) - feature in Fresh & Easy Buzz. "The Insider" will be exploring all aspects of what's happening in - and what he's hearing about - the food and grocery retailing business, with a focus on - but not limited to - California, Nevada and Arizona - the three states where Tesco has its Fresh & Easy Neighborhood Market fresh food and grocery stores.]
>Read The Insider's previous column - April 29, 2010: Heard on the Street: There's Something About Albertsons ... In Southern California.
[ Fresh & Easy Buzz's The Insider columnist departs a bit today from his usual column format to offer some analysis and commentary on the growth of the discount food and grocery retailing segment in the United States, the rush to create new price-focused, discount grocery formats, and the proliferation of new stores by existing discount segment grocery retailers.]
The price-focused discount food and grocery retailing segment and number of discount format stores in the U.S. is growing like topsy.
Exhibit A: Supervalu, Inc. the third-largest traditional supermarket chain and fourth-largest retailer of food and groceries in the U.S., says it's doubling the number of its hard-discount Sav-A-Lot stores over the next five years, from about 1,200 currently to about 2,400, including opening 100 new Sav-A-Lot units this year.
Then there's Aldi USA, the American division of Germany's Aldi International, the global hard-discount grocery retailing company. Aldi USA is opening about 100 new stores as well this year, including a few dozen in its newest market of Texas, which it entered in late 2009. Aldi USA opened around 100 new units in 2009.
In the Western U.S., Idaho-based Winco Foods, which is an every-day-low-price (EDLP) supermarket chain operating stores in the 90,000-1000,000 square-foot range, is opening numerous new stores in the Western U.S. and plans to enter Arizona with multiple stores in the near future.
Last - but far from least - is the EDLP discounter from Bentonville, Walmart Stores, Inc. Walmart continues to open new supercenters, convert existing discount stores into combination food-grocery and general merchandise supercenters, and locate smaller, hybrid supercenters, like the one it opened in Modesto, California in 2008, in vacant buildings in the 70,000 -to- 100,000-plus square-foot range, as it can find them. For example, It currently has two such hybrid supercenters planned for Southern California in vacant buildings of about 75,000 -to- 80,000 square-feet.
The brawny retail brawler from Bentonville also continues to test various small and smaller-format food and grocery stores, including its Marketside by Walmart, Neighborhood Market (and Neighborhood Market by Walmart), Supermercado de Walmart (Hispanic format supermarket), along with its combination grocery and general merchandise Latino consumer-focused supercenter and club store formats.
Exhibit B: Next there's the fast-growing dollar-store discount format. Most dollar-store retailers offer a substantial selection of packaged food and grocery products in their stores. And some, like the Southern California-based 99 Cents Only chain, devote about 50% of store square-footage to food and grocery items, including fresh meats, produce and other perishables.
Dollar General Corp., the largest U.S. dollar store format chain with more than 8,800 outlets in 35 states, plans to open a whopping 600 new stores this year.
Additionally, Family Dollar, which has about 6,600 locations in the U.S., says its adding about 200 stores this year. Family Dollar has been increasing the amount of square footage it devotes to food and grocery items in its stores over the last year. [Suggested reading - April 15, 2009: Family Dollar Discount Store Chain Increasing Amount of Store Square Footage Devoted to Merchandising Food-Grocery Items in Stores Beginning in May] The retailer's percentage of sales from consumables has increased significantly since the recession began.
And not to be outdone, Dollar Tree, which has 3,800 U.S. locations, says it too is opening around 200 new stores in 2010.
Lastly, the earlier mentioned Southern California-based 99 Cents Only dollar format chain is also in expansion mode, opening numerous new units this year and entering new markets such as Northern California, where it opened its first store in 2009, and has plans for many stores over the next couple years.
Exhibit C: The disount segment is getting new entrants. New discount food and grocery store formats are popping up all over. For example, Texas grocer H-E-B opened it's discount store prototype store, Joe V's Smart Shop, in Houston, Texas on May 5. If Trader Joe's has its way the Joe V's name won't last long. But it's the format, not the name, The Insider is concerned with today.
Additionally, on Thursday (May 13) the Giant Eagle supermarket chain, which is based in Cincinnati, Ohio, opened the first two stores of its new Value King no frills, discount store format. The two stores, which are about 27,000 square-feet, are located in Pataskala and Reynoldsburg, Ohio. More units are on the way.
Like Aldi and Save-A-Lot, Giant Eagle's Valu King format is limited assortment. The stores carrying about 3,000 SKUs. And like the two hard-discount grocers, Valu King is all about low prices.
Southern California-based Smart & Final is also getting into the discount format grocery retailing business. This summer is will open five SmartCo Foods supermarkets, a new format for the retailer, in the Metro Denver, Colorado market region. Plans call for numerous additional units in the state. The first five stores will all be in former Albertsons supermarkets.
According to Smart & Final, the SmartCo Foods format combines the features of a supermarket, warehouse club store and farmers market, with a focus on price and value.
The retailer operates Smart & Final banner non-membership warehouse stores, cash & carry stores, small supermarkets called Smart & Final Extra and the Henry's Farmers Market chain, so the synergies are certainly there to combine those formats into one. Whether it will be a success or not is another question, as is always the case. Combining the various formats under one roof into a single format could be a powerful combination if done well. Doing so also appears to offer a strategy beyond just price. The SmartCo Foods stores are about 30,000 -to- 40,000 square feet.
Numerous other grocers are looking at and working on discount grocery store formats. Discount seems to be today what the upscale format was in the U.S. from the early 1990's -to- the early 2000's in terms of focus and ubiquity. You might call that era "upscaletopia."
If you multiply the square-footage of just the new discount stores The Insider has mentioned so far, it adds up to millions of new discount food and grocery retail square-footage in the U.S. over this year and next.
The sixty four thousand dollar question (well, one million dollar question, indexed for inflation) is: 'Can all of this additional discount grocery square footage be absorbed in the U.S.?'
The Insider isn't sure it can be. After all, this collective discount store growth was hatched in the midst of a recession. While I believe frugality in grocery shopping will be with us for another couple years at least, and perhaps to a limited extent become a longer-term trend, we're already seeing many wealthier and perhaps not so wealthy consumers turning back to higher-end grocers for at least some of their food and grocery shopping. For example, Whole Foods Market reported last week it doubled its net income for its fiscal year second quarter over last year.
As the economy improves, particularly employment and consumer confidence, The Insider thinks the trend towards more shopper dollars going to higher-end grocers will increase even more so. I don't expect a rapid return to upscale store grocery shopping like we've seen in past recessions; this one is too long and to deep. But we will see a return to a noticeable degree, none-the-less.
With all the new discount retail grocery square-footage coming on line don't be surprised if come about mid-2012 we don't see some of the discount operators face a crisis of sorts similar to and the converse of what many supermarket and upscale grocers have been facing for the last few years, mainly an over-saturation of discount format square-footage for what the current, recessionary market will bear.
When unemployment is back to say seven percent or so and consumer confidence is much higher - let's say by early 2011 if the gods are with us - might we not see a significant flight from discounters to more mainstream supermarkets and upscale operators, just at the time when so much of this new discount grocery square-footage is online in the form of existing operators opening new stores and in new stores created by the numerous grocers now introducing their discount prototypes?
Of course, many economists and analysts believe the U.S. is in the midst of a trend towards becoming an overall poorer country in terms of average income. And, unfortunately, there are numerous statistics that suggest this might be the case. In many ways, the retailers bringing all this discount grocery square-footage on the market are betting on this trend, consciously or unconsciously. And if it is true, they might have a winning hand.
But The Insider has seen format trends on fast-forward before, and can't help thinking that's what might be happening when it comes to the discount segment. For the last three years it's been the winning format in U.S. food retailing. As such, just like when one sees winning trends in other walks of life, it's tempting to jump on the one that's currently performing best and ride it, both because you think it could work, but also because you fear if you don't your competition, who operates a discount format, just might eat your lunch. Just like basketball, grocery retailing requires both offense and defense, after all.
Ironically, The Insider believes one state where opportunity does strongly exist for additional hard-discount grocers is California, specifically in some regions of Southern California like the Inland Empire, Los Angeles and a couple others, along with in the Central Valley, from Bakersfield south to Fresno, and into the Northern Valley to Stockton, then on up to the Sacramento region.
Aldi has no presence in California. And Supervalu, Inc. has just a handful of its Sav-A-Lot stores in the state - a couple in Southern California and a couple in the southern Central Valley.
Further, Walmart has a minimal food and grocery retailing presence in these California regions, which is something the mega-retailer is working hard to change.
Winco Foods is putting a major effort in opening new stores in Southern California, the Central Valley and in the Sacramento area, but at present has only a handful of its 74 stores are located in these regions.
The main price-focused discounters in these three regions of California are big box warehouse chains and independents like Food 4 Less (Southern California and the Central Valley), Save Mart's FoodMaxx (Central Valley and Sacramento region) and a few others. These grocers by and large do well in the discount niche, and of course there are other competitors like supermarkets, mass merchandisers and club stores (and those dollar format stores) going after the discount shoppers food and grocery dollar. But I do see an opportunity for hard-discount format grocers like Aldi, Sav-A-Lot and others to open some stores in these regions - and do well. Store location is key, of course.
The Insider thinks there's also an opportunity for a couple existing , local supermarket chain operators in these California market regions to create smaller-format (under 50,000 square-feet) discount stores. I'll be addressing that concept specifically in a future column.
From a retail format and merchandising perspective, Tesco's Fresh & Easy Neighborhood Market stores have one foot (or perhaps aisle is a better metaphor) in the discount grocery segment, a second aisle in the fresh, prepared foods segment, a third in the Trader Joe's-like niche, and a fourth aisle in the mini-Whole Foods Market niche. So far this hybrid merchandising approach under one roof as a format hasn't shown success. There's still time for it to do so of course. Low price, both everyday and via promotions and store coupons, is s key focus across all categories at Fresh & Easy though.
The Insider's overall bottom line: Once the recession ends and unemployment starts coming down in the U.S., grocers that have an exclusive or majority price focus will need to have a post-recession strategy in place that includes other elements of merchandising for two reasons. First, with all the new discount food and grocery square-footage coming on the market, competition in the segment will be even stiffer than it is now. Second, as the economy and consumer confidence continue to improve, more and more shoppers will take some of their food and grocery dollars back to higher-end grocers. We're already seeing signs of this with last week's Whole Foods Market numbers and yesterday's first quarter report from Walmart, which saw a slight drop in same-store-sales for its U.S. stores. The retailer even attributed it in part to wealthier shoppers who've been shopping Walmart in the recession trading up and returning to higher-end chains like Target and others.
Shopper frugality is going to be with us for sometime. However, there's also a pent-up desire among consumers to splurge a bit. As the economy improves I see that desire being fulfilled to a certain extent at the expense of grocers that focus only on price.
When it comes to retailing in general, and particularly food and grocery retailing, focusing on price is actually the easiest thing to do from a merchandising, although not a profitability, standpoint. But if a retailer focuses too exclusively and for too long on just price at the expense of the other merchandising elements its retailing skills can get a bit rusty.
Shopper frugality is going to be with us plenty longer. But there's also a pent-up desire among consumers to splurge a bit, including on food and groceries. For example, the talented, savvy and observant east coast independent grocer Stew Leonard Jr. said this week his customers are doing just that, sighting as one example a substantial increase in sales of high-end cheeses at his four high-volume Stew Leonard's supermarkets. As the economy improves, this trading up by shoppers, combined with all the new discount grocery retail square-footage being added in the U.S., could pose a big challenge for those retailers with all or most of their focus in the discount segment.
[The Insider's Heard on the Street column is a regular - weekly -to- fortnightly (every two weeks for the non-bilingual) - feature in Fresh & Easy Buzz. "The Insider" will be exploring all aspects of what's happening in - and what he's hearing about - the food and grocery retailing business, with a focus on - but not limited to - California, Nevada and Arizona - the three states where Tesco has its Fresh & Easy Neighborhood Market fresh food and grocery stores.]
>Read The Insider's previous column - April 29, 2010: Heard on the Street: There's Something About Albertsons ... In Southern California.
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1 comment:
If all those Dollar stores get opened this year or even into 2011 my hunch is something will have to give. There's only so many consumer dollars to go around. Either the dollar stores will take from other formats and put some out of business or the dollar stores will find themselves with too much square-footage and start closing stores.
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