Turbulent Times For Retail

All across the country, we see evidence that food retailing is fundamentally changing. In the New York metro area, the once mighty Great Atlantic & Pacific Tea Company (A&P) disintegrates before our very eyes. In all one does in business, one should remember this: There was a time when A&P bestrode the land no less mightily than Wal-Mart does today. It was the world’s largest retailer. Yet, what value is left is in its real estate. Nothing is forever. From ashes to ashes, from dust to dust.

Consolidation abounds — Safeway and Albertsons, now Ahold and Delhaize — yet these mergers, though they may provide sustenance for Wall Street dealmakers, seem unlikely to provide much value to consumers.

Although lawsuits are flying in all directions, the fundamental fact remains that, for whatever reason, Haggen’s attempt to grow from 18 stores to 164 locations in one day, while bringing an unknown brand and different concept into the California market, is failing and demonstrating both the difficulties inherent in the supermarket business today and that much depends on one’s ability to execute.

There is interest by almost every chain in opening smaller scale urban formats, lately best signified by Ahold’s recent fresh launch in Allston, MA. The concepts may be winners: In the UK, the “express” and “local” versions of the big chains have come to dominate the market for small convenience-oriented stores, displacing lots of independent and ethnic retailers.

Though driven by many factors – growing urban hipster populations, the difficulty in securing prime suburban sites, etc. – it is also true that a symbiotic relationship is coming into being between online shopping services and these small fresh formats. Urban dwellers can buy their big volume weekly shop online and then fill in with a run across the street to one of these small store urban concepts. This fill-in requirement means the stores have to orient heavily toward fresh items and foodservice options.

The discounters are rolling out fast across the country, with Aldi being the most aggressive, but with Lidl soon to appear and Supervalu spinning off Save-a-Lot so it can raise capital, focus management and grow faster. Yet the funny thing is that the discounters are not just about being cheap anymore. The extraordinary transition that Aldi pioneered, and what distinguishes today’s deep discount category from, say, dollar stores, is that today’s discounters have moved from stores designed to serve the poor to stores designed to serve “smart shoppers” who want to spend their money wisely. This means that Aldi and the discounters have had to change assortment to be more “on trend” with organic, gluten-free and other specialty offerings.

The founders of Whole Foods brilliantly understood the power of the idea of a retail concept carrying items good for the world and good for the consumer. As with many niche ideas, though, this concept has become so successful it is becoming mainstream. If the practical manifestation of the ethos is organic or local, and those products are available elsewhere for less, it will become difficult to see Whole Foods delivering the kind of growth in the future that it has in the past.

Whole Foods’ recent efforts to focus on the story behind the food, through its “Responsibly Grown” initiative, have suffered as producers protest its grading system, but the big unknown is to what degree consumers are willing to change their purchasing habits based on these criteria. There is some evidence that retailers caught procuring product from companies mistreating workers or misusing natural resources can be hurt, but there is less evidence that doing things right increases consumer preference.

Online is booming, with Amazon seemingly having decided that nearly 10 years of development in Seattle was sufficient and now it is ready to roll out across the country. There is a lot of evidence that many consumers prefer click-and-collect to delivery, and that positions brick-and-mortar retailers to have an important role in the online space, but most of the conventional chains have invested only sparingly in online and may not seize the opportunity.

The big success stories are national (and international) chains with very specific market positions: Costco, Aldi, Trader Joe’s – they are proving themselves exceptionally successful competitors with clear market positions.

In contrast, conventional grocery struggles. They are not as inexpensive as Aldi, as epicurean as Trader Joe’s, as convenient as Amazon Fresh or Fresh Direct, or as high quality as Costco. Conventional supermarkets seem unable to respond. Trader Joe’s was bought in 1979 by the family that owns Aldi. Aldi itself opened in the United State in 1976; Costco opened in 1976, and Amazon spent 8 years developing its Amazon Fresh concept. Yet just as they allowed Wal-Mart to roll across their territory without fielding a competitive supercenter of their own, most conventional supermarkets seem fully prepared to allow their territories to be infiltrated by these up-and-coming concepts without any direct response.

And Wal-Mart? It is stuck in a hard place — not as inexpensive as Aldi, yet with a brand that means not just low cost, but downscale.It has massive square footage, but as business shifts to online, it is not clear the world needs that much square footage. More than a decade ago, Bruce Peterson suggested Wal-Mart should sell the stores while someone still wanted to buy them. Time may prove him prescient.