Turning Points 2008: Small Format Stores
Commentary by Ron Margulis
Editor’s note:
In what we plan to make an annual end-of-year tradition, RetailWire has
compiled a list of the most significant retail industry "Turning Points" of
2008. (See
our news release…) What follows is the twelfth and last in
a series of discussions based on the list.
Only a few years ago,
any food store less than 40,000 square feet was considered a mom
& pop grocery, not a real supermarket. The chains, and some independents,
raced to build stores that rivaled even the 160,000 square foot scale of
the Wal-Mart Supercenter. These mammoths carried every brand possible along
with two and sometimes three private labels lines; charging past the 100,000
SKU mark.
During the last 18 months,
the industry has experienced a sea change. Several new entries from foreign
and domestic competitors are recreating the competitive landscape and,
based on their success, the nation may soon see a more compact supermarket
format as a viable competitor to the traditional big box.
Tesco’s 12,000 to 15,000
square foot Fresh & Easy stores in California, Nevada and Arizona are
among the progenitors of this new species of supermarket. The locations,
nearly 100 have opened since Fall 2007, emphasize produce and prepared
foods, and promote the Fresh & Easy private label throughout the store.
The appearance of Tesco’s
Fresh & Easy stores has prompted Wal-Mart, Safeway, Whole Foods and
others to develop compact supermarket formats. Wal-Mart opened its Marketside
grocery stores in Phoenix in October and Whole Foods is testing a small-store
format in Boulder, Colo. Safeway opened a 15,000-square-foot store called "The
Market" in a former Vons supermarket in Long Beach, Cal. in May after
working on the format for more than a year. Like Fresh &
Easy, the new store emphasizes fresh produce and prepared foods, but also
features full-service meat and seafood counters and other developments borrowed
from Safeway’s larger-sized Lifestyle format.
While Fresh & Easy
stores have captured many of the compact supermarket headlines over the
past year, they weren’t the first chain testing a compact supermarket.
In 2003, then Alberston’s-owned Jewel developed a prototype store in Chicago
that featured prepared meals and other convenience food in departments
like an oversized deli and a sushi counter. Now, Albertson’s current owner,
Supervalu, is testing a 16,000 square foot compact supermarket called Urban
Fresh that will focus on ready-to-go meals, along with a selection of fresh
meats, seafood and produce in Chicago’s Lincoln Park section.
The compact supermarket
still represents a tiny share of the U.S. grocery retail market, but observers
note that it is the fastest growing segment in the industry. With the economy
tanking, the time for a conveniently located store that allows shoppers
to quickly buy the products they want may be here.
Discussion Questions:
What does the future hold for smaller supermarkets? Are superstores destined
to go the way of the dinosaur?
No, superstores and large-format grocery stores aren’t obsolete–but small-format stores have a lot of growth potential. It’s akin to the trend in general merchandising where smaller formats like Kohl’s have taken market share away from larger mall anchors, based on ease of navigation and more tightly edited assortments.
Small-format food retailers can accomplish some of the same things as long as they avoid turning into glorified convenience stores (with inflated prices). Focusing on fresh produce, meat and dairy as well as a narrower choice of packaged and prepared foods offers a compelling alternative–and the footprint is a lot more flexible as part of a real estate strategy.
Superstores, the one stop shopping store and the model they represent, are here to stay. This is the best way for shoppers to save time and get the selection they want without wasting gas. There is a place for a small format store, but as the C-store morphs into this model, the small format store will become more of a niche player rather than a model that truly offers something special for the consumer. Everything has its place, but the presence of the small format store does not mean that the other models are going away.
Smaller supermarkets are “destinations” for consumers, they serve a very specific purpose.
As double income households become a necessity, as family budgets decrease and curtail the weekly large grocery purchase, as “casual dinning category” visits decrease due to the economy, the necessity to increase shopping visits for families will increase and it will be to these smaller formats.
It’s not going to make superstores obsolete, but it will change the shopping behavior. The immediate impact of the new smaller formats with their meal-solutions will be felt outside of the grocery category; like the casual dining category.
The “destination” function also works with specialty items since smaller grocers will have the speed or turn to justify stocking the items.
As consumers, our definitions of convenience, practicality, and smart-behavior are affected by multiple sources which make them fluid. As marketers we should recognize that factors like the emergence of the smaller vehicles and decline of SUVs will affect the consumers purchase behavior at supercenters and club stores–how is the consumer taking the mega packs of toilet paper, cereal, and water bottles home?
Since less than 1000 items constitute the lion’s share of sales, even in a supercenter, it is less about the size of the store and the poor way large stores serve their most common shopper: buying only one or two items! That’s right, even in the largest stores, across channels and chains, the single most common shopping trip is for a single item.
The real dynamic at play here is the management of the “big head,” what Juran would call the “vital few,” those few hundred items constituting the greatest bulk of store sales; and the “long tail,” the tens of thousands of items that individually make few sales, but in aggregate make a modest contribution to profit.
Before pointing out the proper role of these two DISTINCT groups of products, let me point out that the vast majority of retailers seriously suppress their sales by hiding the big head in the long tail, in hopes that they can coax a few more long tail sales. This is standard retail policy, a good idea for your competition, but not for you. :>)
Here is the important principle: Shoppers are attracted to the store by the long tail; but mostly buy the big head/vital few when they get there. Knowing that Amazon has 50 million books encourages me to know it is a good place to shop for books, because they are very likely to have what I want. It would be retail insanity to expect ME to sort through the pile of “crap,” looking for the one book I want.
The PRESENCE of the long tail is VERY attractive, blocking ready access to the big head/vital few is not good. The little stores have basically lopped off the long tail, but show little sensitivity to the underlying problem, still stirring the vital few into what remains of the long tail.
Notice that Stew Leonard began his vastly successful enterprise with 800 items. Like Aldi and Lidl (with 400 and 700 items) this was strictly a “vital few/big head” store. But notice that Stew has grown to 2000 items–adding some long tail to his big head. And where do you suppose those other 1200 items are? In a separate aisle-shelving (warehouse) section beside the main path as you exit to the spacious checkout area. Methinks H-E-B Central Market was paying attention when they knocked off Stew’s store in Dallas, and included their long tail warehouse, off to the side, about half way through the trip.
If I were running a full supermarket and a small format opened across the street (or next door,) it wouldn’t worry me. But then, I would be a little more discriminating in organizing the merchandising. Rather than the blunt instrument of category management, I would be pursuing item management. But then, who cares? Stew sells 5X as much as the typical supermarket, but he gets a greatly reduced stream of promotional money. So let’s see a retailer use promotional money for something besides suppressing sales (in general) and margins (in particular.)
As noted, the small format trend has been ongoing for many years. It also exists outside the grocery sector, and it’s a format that’s here to stay. It’s not only a nice fit for today’s changing consumer lifestyles, it also provides merchants with more opportunities to reach pockets of consumers. Going forward, an ultra-competitive industry and the need to reach consumers via alternative channels will give this trend even more momentum, e.g., look for small format stores in locations like university campuses and retirement communities.
As for the big-box stores, they’re still a viable format that will dot the retail landscape for many years to come. They’re especially important in suburban and rural areas where consumers have limited access to multiple retail banners.
It’s amazing that some of us credit Fresh & Easy stores as helping to accelerate a so-called sea change in supermarket format preferences. By any measure, Fresh & Easy is a failure. Sales are well below projections and expectations. New locations have been slowed or canceled. What’s so great about this “progenitor” format and why should we care? “Fastest growing segment in the industry?” Yes, since growth from one unit to two units represents a 100% growth rate. This means absolutely nothing. We are such format whores.
And in the future we will continue to be format whores. Rushing to the new and anointing it savior status before it’s been proven. Whole Foods is stumbling over some hurdles. Dollar-type stores, in spite of an economy that supposedly supports their business model, aren’t enjoying the growth they once did.
Oh, and when will we start referring to Walmart instead of Wal-Mart in our comments?
One stop shops and one size fits all are fine for some but not really suited to everyone. We have said many times here that people want different things at different times. Even if gas prices are lower now, there is still some reluctance to drive long distances to shop in a single location. Having visited quite a few locations across the US with quite a few totally different shoppers this year, I am more convinced than ever that choice ought to be available not only within stores but between them. Superstores certainly meet some needs but smaller stores can be far more interesting, flexible and innovative. I do not think there will (or should) ever be a need to decide on one or t’other.
There will always be superstores, and many people with large families will continue to shop these behemoths to load up for their week’s groceries. But the small format store will be the category that sees the majority of growth over the next five years. People who are simply looking to pick up a few fresh items, or a quick ready-to-heat dinner will find that the smaller format store is easier to shop, quicker to navigate, and will serve their needs.
In the UK, Tesco (large format) co-exists with Tesco Metros and Tesco Express. They do not cannibalize one another; instead, they serve different segments of the markets, and the same markets at different segments of time. The same will hold true here in the States.
Trader Joe’s looks smarter and more progressive every day.
Put me in Camille’s camp. I too have long been a fan of small stores but that’s not to say that the superstore is going the way of T-Rex. There’s plenty of room for both. What there is less and less room for is medium size undifferentiated retailers.
Our office in Phoenix (Tempe) happens to be within a few miles of three Tesco Fresh & Easy stores and two of the new Wal-Mart Marketside locations. I agree with the previous comments about the upside potential for these smaller footprints in densely populated areas.
Obviously the ongoing challenge for these stores is to increase sales per transaction and they just won’t be able to gain primary shoppers–and will continue to be “margin focused” vs. “volume focused.” Small stores with a “Price Impact” focus, like Aldi and Sav-A-Lot have done well in rural areas trying to attract customers with low prices–there definitely is a niche for them. Likewise small format specialty stores like Trader Joe’s have carved out a strong niche in larger marketing areas with their unique items and marketing approach.
However, I don’t believe that these new, smaller format stores with a “Fresh” focus will survive in small markets. These stores depend heavily on frequent shopping trips.
I do believe that a hybrid of this format that is “tuned” as a “Superette” with a more pronounced emphasis on prepared meals, superior delis and value added meats will do well in any market.
Those who view consumers as preferring one or the other will not succeed. There are different pockets of consumers with different needs and preferences. Figuring out which consumers in which locations prefer which types of stores with what assortment of products is the key to success, not choosing either super stores or neighborhood stores.
I have always been a proponent of smaller stores to round out a brand’s presence. Grocery is an area where big isn’t necessarily better. Smaller units are easier to control and maintain. But what I like best about small format is the connection the store can make with their customer.
Most smaller outfits that I have been involved with are structured in a way that the store manager and management teams are out on the selling floor. That is how you determine the pulse of your specific location. It is easier for a smaller unit to react to local demand much quicker than their larger counterparts. In retail, small is the new black. Every category has a smaller merchant that provides better service and a more unique product assortment.
Aldi and Save-A-Lot have been opening small stores for several years at a fairly good clip. Only when Tesco began opening stores did it get anyone’s attention. Tesco has opened about 100 stores but most appear to be very low volume and have barely shown on the market share radar. Safeway and Wal-Mart have shown no sign of dropping large store formats and replacing them with small stores. So far the small store format seems more of an experiment for big box retailers. I do think the small store format will continue to be the fastest growing format. Why? Because of the weak economy, Aldi and Save-A-Lot are in and high priced big box grocers are out. Secondly, Tesco appears to be full steam ahead despite poor results. Their mind appears to be made up regardless of the financial impact to the bottom line. Even though Wal-Mart has cut back on its supercenter growth, it is still expanding by more square feet than any other retailer.
It’s not an either-(small or super)-or proposition–never is. The either-or makes for interesting press though; a hook or angle if you will.
First off, when it comes to small-format stores, Supervalu’s Save-A-Lot and Aldi USA are really the test cases for what has worked in the U.S. on a chain level. There are about 1,200 Sav-A-Lot stores and nearly 1,000 Aldi markets, with many more on the way. The empirical evidence is–both are successful.
When it comes to the small-format chain hybrids, led by Tesco’s Fresh & Easy because of the sheer focus of the retailer on the format in the western U.S., the jury is still completely out.
Safeway’s Steve Burd recently said its “The Market” small-format (one store in Long Beach, CA thus far) is doing OK, but that it will have to do much better in order for the chain to even open another 30-35 of the stores in the coming couple years.
Marketside is a mere experiment for Wal-Mart right now. It’s just part of the retailer’s multi-format strategy, which will find at least one more new format hitting the U.S. streets in 2009.
Tesco’s Fresh & Easy isn’t doing very well…and it should be since its no frills and everyday low-price format would seem perfectly set up for the current recessionary economy. It’s now postponed going into Northern California for the second time, for example. It’s had to use $5 off $20 and $6 off $30 store coupons for over a year now; on a regular and not promotional basis. Not good signs.
Of course, we all know single-play (single-format) strategies like Tesco’s with Fresh & Easy are really a mistake for any serious grocery retailer in the U.S. Tesco needs to acquire a multi-format (thinking Supervalue, Inc.) major U.S. retailer in the U.S. (The “stock value” is sure right regarding Supervalu.)
So, in terms of the small/superstore question, it’s easy–more retailers will experiment with smaller-format stores. But they will remain only a part of a multi-format strategy for most chains. Aldi is an exception. Wawa is another, in terms of a hybrid c-store/grocery store format.
The trend as I see it is for chains to be more multi-format rather than operating fewer formats in the U.S. Wal-Mart will lead this. It’s working on two new formats–one an Hispanic store for younger Hispanics and the other sort of a smaller version of a Supercenter. Look for Target to possibly do something more hybrid for grocery retailing in 2009 as well.
Superstores, supermarkets, supercenters, warehouse stores, neighborhood independents–all here to stay. For the chain world its more multi-format–including small format experimentation.
This is a real change. Much of the excitement of large stores has been usurped by the web. People can find what they want online. Problem is to get it close by. This goes for food as well as other products.