CHICAGO -- The grocery store is getting a makeover. For decades, traditional supermarkets dominated the $624-billion-a-year food-selling business with predictably stocked midtier stores that sold goods at high prices and teased customers with weekly specials.
But since Wal-Mart Stores Inc. became the nation's largest food seller in 2001 and other retailers began adding food, grocers have started making some of the biggest changes the industry has seen in decades, according to a report in The Wall Street Journal. New stores have fewer packaged products [image-nocss] in the center aisles and feature larger spreads of prepared foods. They sell more organic food and allow patrons to pay with the touch of a finger.
It's too soon to tell whether the moves will help pull grocers out of their slump. Sales at the nation's largest grocery chains have been slow and profits inconsistent for most of the past several years. Here are some of the major trends in the grocery aisle, according to the report.
Leaving the middle
Supermarkets are moving up and down market to set themselves apart from a wave of nontraditional competition that has stolen the middle.
To reposition itself as an upscale chain, Safeway Inc., the nation's third-largest traditional supermarket company, invested $100 million in a massive advertising campaign this year and millions more in store remodeling over the past several years. The Pleasanton, Calif., company is building so-called lifestyle stores -- sophisticated shops with better-quality produce, softer lighting and classes in skills such as flower arranging. New advertising is attempting to brand the experience of shopping at Safeway the same way consumer packaged-goods companies brand their products.
Southern retailer Winn-Dixie Stores Inc. of Jacksonville, Fla., also is nudging its stores toward the higher end as part of a massive turnaround effort. It's starting by stocking chardonnay and bouquets of roses in the produce aisle.
Other grocers are dabbling in new formats that sell cheap goods to capture the low end of the market. Albertson's Inc. of Boise, Idaho, the nation's second-largest traditional grocer, last year created a subsidiary that runs limited-assortment stores with low prices under the Super Saver banner. Great Atlantic & Pacific Tea Co. of Montvale, N.J., has been shedding stores so it can focus on two different formats: upscale fresh stores and discount locations.
Food is everywhere
Drugstores, big-box discounters and even hardware stores are adding more food, especially fresh groceries, and increasing pressure on traditional grocers to protect their turf. A decade ago, nontraditional grocery formats accounted for 8.9% of total grocery sales, according to Willard Bishop Consulting, a retail-marketing consulting firm in Barrington, Ill. Last year, they accounted for 31.9% of grocery sales.
Food has narrow profit margins, but retailers are adding it because it brings customers into stores more frequently. The hope is that shoppers also pick up bigger-ticket items.
Target Corp. of Minneapolis is more than doubling its food offerings in new and remodeled general-merchandise stores and adding refrigerated coolers. By January, Atlanta-based Home Depot Inc. plans to open convenience stores in parking lots of four of its home-improvement outlets in Nashville; the stores will sell milk and prepared breakfast and lunch foods.
Off center
Grocery sales have sagged the most in recent years in the so-called center of the store -- those middle aisles filled with laundry detergent, toothpaste, garbage bags and cooking staples. Driving this loss of revenue: the discount stores and changing culinary habits. "People don't shop the center as much as they used to," said Peter Lynch, chief executive of Winn-Dixie. "It's because the aisles haven't changed for 30 years."
In response, grocers are shrinking the display space in the centers of their stores and fattening the periphery. All around the edges of stores, where prepared foods and fresh produce have traditionally been located, consumers are finding more space devoted to ready-to-eat meals and better produce.
Whole Foods Market Inc. of Austin, Texas, is leading the industry, adding more prepared dishes from wood-burning pizza ovens and stir-fry stations. But other chains are starting to catch up. Winn-Dixie is paring its center and resurrecting sandwich bars.
Nothing special
Kroger Co. of Cincinnati, the nation's largest traditional grocer, has spent the past four years funneling cost savings into lower prices in order to narrow the gap with discount stores. Some grocery chains are also moving away from weekly specials in favor of lower everyday prices, especially on items that consumers buy frequently.
Shoppers used to plan their purchases around the specials advertised in grocery circulars, giving supermarkets incentives to offer new deals several times a month. That strategy has become less effective now that Wal-Mart, Target and Costco Wholesale Corp. have started luring customers with consistently low prices.
The consulting firm A.T. Kearney is advising traditional grocery clients to switch to what it calls a "no insult" pricing and promotions strategy. That means coming close to, but not necessarily lower than, discount-store prices on items that consumers know they can get cheap if they shop around.
Fast pay
Grocery chains are adding high-tech payment systems that allow shoppers to check out with an identification number and the touch of a finger. Albertson's stores in Oregon, some stores of Cub Foods, Stillwater, Minn., and other chains have installed a system by San Francisco-based Pay by Touch Solutions that identifies customers with a scan of their finger. The scan picks up a series of data points from the physical shape of the finger, not a fingerprint.
Rival BioPay of Herndon, Va., has a similar system in use at Lowes Foods of Winston-Salem, N.C.
Slotting fees slipping?
Grocers are slowly moving away from a practice that has long been standard in the industry: charging product makers for shelf space and levying other promotional payments. Wal-Mart set the example by not charging so-called slotting fees for shelf space. Now Safeway has stopped taking vendor allowances from some manufacturers.
"It takes a lot of cost out of the system," Steve Burd, chief executive of Safeway, told an investor conference in March. "There would be somewhere between 50 and 100 accountants in Arizona that we wouldn't need," he said, if the company simplified its payments system. Food makers, however, say that grocers are still a long way from eliminating the fees.
Private push
Store-branded products continue to take up more shelf space and gain cachet. Over the seven years ended in 2004, sales of private-label goods grew at more than twice the rate of branded goods, according to ACNielsen, and now account for 15% of supermarkets' packaged-goods revenue. Grocers like to stock private-label products because they have wider profit margins. Milk, cheese, paper products and eggs are among the largest private-label categories.
Now that private labels have gained customer acceptance, grocers have started making upscale store labels. Safeway has rolled out its own line of premium beef, under the name Rancher's Reserve, and its own brand of fresh soups.
Targeting labor
Traditional grocers have been paring labor costs to compete with the growing number of non-union retailers that sell food. During the past three years, Safeway has restructured all of its major labor contracts with its largest union so workers take more time to climb the wage ladder and pay a greater share of their health-care costs.
The push has been costly for grocers, who have struggled to regain market share in Southern California since a massive labor dispute two years ago that had thousands of workers at Kroger, Albertson's and Safeway on strike or locked out for more than four months. And future labor negotiations may be no smoother. The United Food and Commercial Workers, the main union representing grocery workers, hopes it will become more powerful with a new parent, Change to Win Coalition, a group of unions that broke ranks with the AFL-CIO in July.
Grocers also are trying to depend more on self-checkout lanes that reduce the need for grocery clerks. As of this year, 56% of food retailers had installed self-checkout lanes, up from 15% in 2001, according to the Food Marketing Institute, the grocery industry's Washington-based trade group.
Yours for a dollar
The popularity of dollar stores is prompting grocers to add more dollar merchandise. More than 27% of new grocery stores had aisles designated for dollar merchandise in 2004, up from just 6% in 2002, according to the Food Marketing Institute. Experts say that shoppers like the treasure-hunt feel that comes from picking up unexpected items on the cheap.
Organic offerings
The mainstreaming of organic foods has prompted traditional grocers to sell more fresh and packaged natural and organic goods. Sales of organic and natural food in the U.S. and Europe totaled $35 billion in 2004 and are expected to hit $59.2 billion by 2009, according to research firm Datamonitor. That's partly why Whole Foods, which specializes in organics, has become one of the most successful grocery chains in the industry.
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