Sector Spotlight: Grocery

Grocers have been busy over the last few years trying to keep up with shoppers’ changing habits. While a few years ago, it was all about the foodie and health and organic food options, today’s consumer has one thing on her mind when it comes to grocery shopping: Price. She’s still eating more meals at home, choosing brands based on price alone and seeking new places to fill her family’s food pantry, including hard-discount food retailers like Aldi and Save-A-Lot, or price behemoth Walmart.

And this frugal behavior is not likely to change any time soon. Sixty-four percent of consumers say they’ll shop at a different store with lower prices, even if it’s less convenient for them, according to a “New Marketing Imperatives” survey by Booz & Co. Of the 2000 U.S. consumers surveyed for the report, just 9 percent plan to spend at pre-recession levels on household products in the next 12 months.
 

This “New Normal,” as it’s being referred to, is forcing grocery retailers to rethink everything from pricing and products selection to the types of stores they operate.
For Lee Peterson, vp, creative services, WD Partners (Dublin, Ohio), which works with such retailers as Giant/Stop & Shop and Walmart, the focus on prices is alarming. “To me, that’s sad,” he says. “You should stick to your brand.”
 

For one, he adds, because “the whole notion of price is dominated by Walmart.” So while last year Peterson says every client wanted to focus on price, he began talking to grocers about incorporating targeted price-based messaging into stores that conveyed a value message without sacrificing a grocer’s true brand identity. “More traditional grocers never had to push price as a number one message,” he says. “It was always more about quality and selection for them. They shouldn’t lose that message.”
 

Peterson suggests that, rather than cover your store with discount banners and price break tags, retailers can create dedicated value sections within a store or department where price is the dominant factor. Simple, powerful graphics and gondola presentations can draw attention to the area, while leaving much of the rest of the store to the brand’s original message.
 

Sharon Lessard, vp, store design, SuperValu Inc. (Eden Prairie, Minn.), says another important message to relay to consumers is the broader sense of value. “It’s a strong message, which combines price, products and services.”
 

And one area where grocers are seeking to add value is with their private-label offerings. Following years of beefing up their product selections with near-endless varieties of ketchup, canned tomatoes or toilet paper, grocers are now taking a harder look at what’s on their shelves and doing some editing. In the process, they’re also making more room for their own lower-priced branded items.
 

Lewis Paine, senior vp of retail marketing consultancy GfK Consumer, writing on “The Evolution of Private Label at Retail,” says that the majority of consumers believes that retailer-sponsored products are at least as good as nationally branded products and 48 percent says they prefer and seek out private brands.
 

This awareness, coupled with shoppers’ frugal state of mind, is driving the private-label push. SuperValu, which operates Albertsons, Jewel-Osco and Sav-A-Lot chains, is taking action by reducing the number of items it offers per store and increasing its private-label offering. SuperValu ceo Craig Herkert says the move is less about eliminating entire product brands than weeding out redundant package sizes, and he expects shoppers will appreciate the edited selection.
 

Such efforts can also add to the bottom line while boosting brand value. “Retailers want to feature private label more because the margins are better, so they’re going vertical with it,” says WD’s Peterson. “They’ll narrow down brand selection from several to two along with their private label.”
 

Peterson suggests private label may eventually lead to another trend. “Sooner or later, some private labels will start to be pulled out and turned into their own stores,” he says.
That idea supports another trend dotting the food market landscape: retailers going multi-format. “Now, instead of one store concept, you see grocers with a portfolio of formats,” including super, value and traditional, says Peterson.
 

SuperValu plans to double the size of its discount Save-A-Lot chain nationwide to more than 2000 locations in the next five years. Target is investing $1 billion to renovate 340 existing stores in 2010 with expanded grocery content.
 

In the Midwest, supersized Meijer is planning a downsized version of its traditional stores, with the main focus on grocery. “It lets us put stores where we never would have been able to put one before,” Meijer spokesperson Frank Guglielmi told The
Indianapolis Star. At about half the size of traditional Meijer stores, these new locations will carry groceries that reflect the ethnicity and demographics of surrounding neighborhoods.
 

“By being more demographic centric, that’s a good way to compete with Walmart,” adds Peterson.
 

Brian Fleener, senior principal at MulvannyG2 (Portland, Ore.), says a return to urban living is also providing a new opportunity for larger grocers. “There’s a trend in smaller, full-service groceries in the urban environment,” he says.
 

Walmart and Target are two examples of chains testing smaller locations for dense urban markets.
 

Based on this awareness, MulvannyG2 recently completed an unsolicited urban design for an established, traditional grocery chain. Taking cues from European market-style shopping, the concept averages 15,000 square feet, or roughly the size of an urban corner lot, with merchandise centered on grabbing lunch or that night’s meal on the way home from work. Randy Sauer, principal, MulvannyG2 Architecture, says that “a street-side presence drove the layout,” including bringing floral and produce out onto the sidewalk to attract passersby and using roll-up doors to convey an authentic, yet modern, shopping experience.
 

“Buying power is moving to more pedestrian-scaled denser areas with a new generation growing up that’s more comfortable in urban settings,” says Sauer. “Large-format brands have recognized this and will have to follow the customer.”
 

Strategies like these may provide one of the ingredients retailers need to pull them through the next few years as the economy and consumer confidence starts to rebound. “At the end of the day, private label and an influx of multi-format will get us out of the price-is-everything model,” says Peterson.

Community Connection
Randy Sauer, principal, MulvannyG2 Architecture (Portland), says he’s seeing the focus on pricing also affecting store design and construction. “Grocers are asking where do we need to contribute to the customer experience and where can we pull back?” he says.
 

One area where MulvannyG2 encourages retailers to invest is in efforts to make consumers feel connected to their community through the store environment. That includes investing in sustainable materials, offering ready-to-go meals and in-store dining that creates a gathering spot, and incorporating more daylighting windows and clerestories that bring more natural light into the store while maintaining a connection to activity on the sidewalk.
 

The trend is also affecting product offering. “More grocers are offering local produce and products,” he says.