Will Service Delis Have A Place In Small Stores?

The hottest trend in food retailing today is the small store concept.  In the United Kingdom, players such as Tesco, Sainsbury’s, Marks & Spencer and Waitrose have all had great success adapting their larger supermarket concepts into what are mostly urban convenience stores. In the United States, the fastest growing concepts are deep discounters, such as Aldi and Save-a-Lot, and epicurean concepts, such as Trader Joe’s, all of which are small format stores.

Many chains are experimenting with new small concepts, such as Ahold with its Bfresh store in Alston, MA, following on its Everything Fresh store in Philadelphia, and Wal-Mart, experimenting with its Walmart Express and Walmart To Go concepts.

The reasons for this emphasis are clear:

First, it is very difficult to get large sites anymore. So if a chain is looking to grow and expand, it needs an alternative. This is one reason why Tesco went with the small-store concept when it chose to enter the U.S with its Fresh & Easy concept. If it had decided what Americans wanted was 70,000 square foot stores on prime suburban corners and it didn’t want to do an acquisition, it would have taken decades to get a critical mass of stores.

Second, the growth of warehouse club stores and big-box retailers has made it very difficult for supermarkets to compete on many products. Sure it may still be more convenient, but on staples of all kinds, consumers can get the same product cheaper at other outlets. This inevitably puts pressure on sales and pressure on margins, so filling a large store with such staples makes it hard to get a decent return on investment.

Third, the growth of Internet shopping is changing the dynamic by which consumers interact with food stores. In places such as London, where there are mature Internet offerings combined with substantial small store offerings, a dynamic has arisen where people order heavy or bulky staples online and then fill in with perishables at the local version of a big grocer.

It all makes perfect sense but also poses a great question as to the future of the supermarket deli. When Tesco’s Fresh & Easy opened in the U.S., it elected to not have a service deli.  Both Aldi and Trader Joe’s eschew service delis.

It is easy to imagine the reasons why the executives that run these concepts might resist the idea of service delis. Many of these concepts are very price-driven, and service means labor, which means extra costs, so avoiding service and labor is a high priority. In addition, because these are small-store concepts, space is a priority. If you can make the sandwiches or cook the rotisserie chicken in an offsite commissary and preserve the precious store square footage for the display and sale of products, rather than preparation, that is a win.

There is also the issue of keeping product offerings fresh. Although some small stores say the Wawa stores in beachside New Jersey during the summer season, are very high volume, many small stores are not.

And we are conscious that Wal-Mart included a service deli when it introduced its small-store Marketside concept in Arizona with the goal of defeating Fresh & Easy should its small-store effort have been successful. The Marketside concept didn’t work.

It may well be that labor, square footage and shrink just make it difficult to integrate service delis with small-store concepts. Yet there are good reasons retailers should not give up trying.

If you look at the extraordinary growth of concepts such as Aldi, its growth has come from transforming itself so that instead of just being cheap, it is perceived as a value operation. One of Fresh & Easy’s mistakes was thinking it could make American consumers perceive food made offsite as equal in freshness and quality to fresh foods assembled on site.

This means the service element has to be used well. Slicing meats and cheese may not do it because a pre-sliced product can now be made with good quality. No pre-made sandwich can be customized as one made for the customer specifically, and hot foods such as pizzas are different than a cold pizza consumer can heat up at home.

The victor of the battle of the small stores may well be the retailer who identifies a way to use service delis shrewdly — as a differentiating tool that allows the concept to offer unique reasons to come to the store. With Internet shopping ascending, few topics are worthy of more thought and attention.