The optimistic case for the deli department is this: Though grocery has long been commoditized, convenience and the cost of information still allowed for profitability. The challenge of online services and a growing range of price-comparison sites means that consumers can now more easily identify where commodities and nationally branded products are cheapest. This will enable these items to be more easily purchased and arranged for delivery.
This is an online extension of the supermarkets’ dilemma for some time. Groceries were more inexpensively available at Walmart and warehouse clubs, but with high-low pricing, not everything had the lowest price and not all the time. So it was difficult for consumers to always find and buy the cheapest product.
Chains such as Best Buy that sell high-priced electronics have been suffering because they became free showrooms. Consumers come in, find what they like, then research where they could get it at the best price.
Grocery items are comparatively cheap, so consumers typically didn’t bother to research each individual item to find out where they could buy it cheapest. And even if they knew, it just didn’t pay to go out of their way.
But now, even Aldi is experimenting with Instacart, so consumers will be increasingly able to identify cheaper vendors and arrange delivery. It won’t be long before consumers will be able to speak to some ALEXA-like device and identify the least expensive way to get all the groceries.
It is hard to imagine making a living selling Tide or Del Monte green beans when one has to be the cheapest to make it happen. So, of course, the answer is to differentiate. This is going to happen with the fresh departments and, to some extent, with a private label that contains unique flavors and formulations. Deli and foodservice departments stand a good chance of being saviors of the store with unique flavors, theatre, everything ripe for differentiation, and, crucially, prices that are very hard to compare.
It is the same effective theory that was used to fight Walmart; Be the anti-Walmart – organic, high-service, community engaged. But in many cases, it didn’t really prove an effective tool at combatting Walmart; it was more a guide for getting out of its way. So chains such as Safeway closed lots of stores in poorer areas while remodeling stores in more affluent areas in its Lifestyle format. In other words, all that service and organic products and fresh worked well with consumers who were affluent enough to purchase amenities they valued; but Walmart just kept growing.
Seeing deli departments as these upscale differentiators are fine, but it will not be sufficient to deal with the enormity of the challenges ahead.
Walmart is the largest food retailer in America, Aldi is the fastest growing established chain and Lidl is the fastest growing start-up food store. They are all discounters. Aldi and Lidl, together have almost a quarter of the grocery market in Ireland. Here, they have, combined, less than 2 percent — for now.
Today, Walmart is about 20 percent of the food market, warehouse clubs are 10 percent and Amazon is 1 percent (that excludes Whole Foods), so likely these new discount formats are aiming for half of the U.S. grocery market. This means that the idea of competing by adding service and other things that add cost is the same as ceding half the grocery market.
For some, this may be a wise strategy. But, on an industry-wide basis, it is a massive retreat for today’s supermarkets.
What we need is a strategy to go high – service, organic, local, culinary– and go low – drive costs out of the supply chain and offer items at competitive prices. Whether this means opening up new Aldi/Lidl-like concepts or finding ways to offer discount private label lines or store-within-a-store formats within conventional supermarkets, if conventional retailers fail to think about the price-oriented shopper, they better hope their market demographics are crying out for high service and differentiation.