Building new relationships between shoppers and fresh
Small has become big in food retail. In the continuing fight for market share in an increasingly competitive landscape, retailers are embracing small format as a way to attract today’s shoppers where and how they shop. Small format is so dominant that the RetailNet Group — a Waltham, MA-based company providing research, analytics and marketing to its clients — projects that nearly all of North American net new store growth through 2017 will be in small format, particularly in urban settings.
Small is relative. Tim Barrett, retail research analyst at Chicago-based Euromonitor International (an independent provider of strategic market research), notes “small” reflects function over form; small format stores have a smaller footprint than a full-size market, fewer SKUs, and a proportionately larger produce department. “
Small format can range from 5,000 to 40,000 square feet, offer just 5,000 high-volume items, feature more fresh foods and limited traditional groceries, and carry up to a couple hundred bestselling produce SKUs,” says Dick Spezzano, president, Spezzano Consulting Service, Inc., Monrovia, CA. “Today’s consumers might shop at a Costco or Walmart Supercenter once a month, and then fill in during the week from small format fresh stores (such as Sprouts Farmers Market and Fresh Market), along with dollar stores and drugstores.” Spezzano notes that small format stores also have lower operating expenses — they’re less costly to build, with lower day-to-day costs, and pay less in labor.
Niches Drive Growth
The small format landscape is quickly being carved into niches. Most visible is the rapidly expanding, European-based deep discounter Aldi. Other food retailers, such as Emeryville, CA-based Grocery Outlet, and Eden Prairie, MN-based SuperValu’s Save-A-Lot, also compete for the price-sensitive shopper. Monrovia, CA-based Trader Joe’s and Phoenix, AZ-based Sprouts appeal to foodies, selling on quality and offering attractive pricing. Trader Joe’s also stands out for its strong private-label lines and light-hearted culture. In 2016, Whole Foods Market’s 365 concept makes its entry into the marketplace with a budget- conscious format.
Roche Bros. Supermarkets, Inc., Wellesley, MA, emphasizes local, enhancing its 21-store chain with two Brothers Marketplace locations. Approximately one-quarter the size of a typical Roche Bros. store, “Marketplace locations place a particular emphasis on local offerings, building close relationships with area farms and working directly with farmers to ensure availability for our customers,” says Dena Kowaloff, director of marketing, Roche Bros. Supermarkets.
Kroger is pursuing two different paths, marketing on freshness and flavor in its new Main & Vine in Gig Harbor, WA, and fast-tracking its entry into the marketplace with its 2015 acquisition of the Chicago-based Mariano’s Fresh Market as part of the Roundy’s purchase.
Some small format settings serve as pilot stores or learning laboratories for the parent companies. Ahold’s Fresh Formats division opened two 10,000-square-foot BFresh locations, in Boston and Fairfield, CT, and a 3,000-square-foot Everything Fresh in Philadelphia, to explore the retailer-customer relationship. “BFresh combines freshness, convenience, and value,” says Suzi Robinson, Fresh Formats spokeswoman, Canton, MA. “Our stores feature a large kitchen area and fresh meals made from scratch to appeal to younger shoppers.”
Chelsea Gross, analyst, RetailNet Group, Waltham, MA, notes that because reinvention is capital-intensive, a growing number of retailers use small format to identify trends and experiment with retail concepts before bringing them to larger stores. The marketplace is likely to become more crowded. In 2015, German-based discounter Lidl established its U.S. headquarters in Virginia and broke ground for construction of regional offices and a distribution center in North Carolina. “We are preparing to launch in the U.S. no later than 2018, with a preferred site layout of approximately 36,000 square feet,” says Will Harwood, Lidl U.S. spokesman, Arlington, VA. “Lidl promises consumers the highest quality produce and other products at the lowest possible prices.”
From Suburbs to Cities
Small format retailers increasingly are responding to the need for fresher foods in urban centers. “Smaller format retailers are in a position to better serve shoppers who have small kitchens and limited transportation options,” explains Bill Drake, director of Executive Education, Food Industry Management Program, Cornell University, Ithaca, NY. “Furthermore, urban areas have limited real estate availability, so it’s hard to build large stores.”
In December 2015, H-E-B opened a new 12,000-square-foot store in downtown San Antonio, where fresh produce and quick meal options had been lacking. Phoenix-based retailer Sprouts Farmers Market increasingly is opening stores in urban centers, most recently near Atlanta.
“Roche Bros. opened a Boston store in April 2015, the first full-service grocery store in that neighborhood,” says Roche’s Kowaloff. “This location caters to urban customers without cars who make more frequent trips and purchase fewer items at a time.”
Cut fruit, fresh-made smoothies, and ready-to-cook, washed, peeled, chopped vegetables are popular in Roche’s Boston store, typical of the types of foods sought by Millennials who are populating urban areas. “Millennials find traditional supermarkets to be boring and full of products they find unhealthy,” explains David Livingston, president of consulting firm, Milwaukee, WI-based DJL Supermarket Location Research. “Wal-Mart is also making a push into urban areas,” says Euromonitor’s Barrett. “It’s the only way for the company to get into larger cities that don’t have space for the true big box store.”
Competing On Freshness First
“Sprouts was ahead of the trend by creating a narrative around freshness and quality, and used that narrative to build and support a community of loyal, mostly higher-income customers,” says Euromonitor’s Barrett. “The net result is sizable compound annual growth, even though dollar sales growth lags behind Trader Joe’s and Aldi.”
“We target the everyday shopper,” says Diego Romero, corporate communications manager, Sprouts Farmers Market, Phoenix. “Everyone wants fresh, so we have a wide selection of everything, including specialty and seasonal. If we can get more fresh items, we will sell more fresh. If we can get more local items, we will sell more local. We might even buy from individual growers.” Romero adds that Sprouts leads with produce at the heart of the store, taking up about 15 percent of the floor space and priced 20 to 25 percent below supermarkets. Sprouts shoppers can see and smell the produce as soon as they walk into the store.
“The stores have a farmers market appeal — they’re aesthetically pleasing, and produce sets the tone,” notes RetailNet’s Gross. “Sprouts uses fresh, well-priced produce as a traffic driver to move consumers to higher margin goods in other sections of the store.”
Fresh Formats also competes on fresh. “We built the format and offerings at BFresh and Everything Fresh to appeal to foodies who have healthy foods top-of-mind,” says Robinson of Fresh Formats. “We’re really happy to see a wide range of shoppers and demographics. Fresh is appealing to all. Fresh Formats shoppers can find everything they need in fresh produce.” Reinforcing its fresh message, Fresh Formats avoids stocking non-fresh items such as trail mix and dressings in its produce departments.
Convenience Is King
“Small format retailers satisfy the American consumer’s insatiable appetite for convenience,” says Cornell’s Drake. “Small format stores are where consumers are — close to population centers.”
Millennial shoppers assemble more than cook, so small format retailers market foods that simplify meal preparation. “Our customers are looking for
‘freshvenience’ in produce,” notes Jessica Winship, perishable merchandiser, Brothers Marketplace, Medfield, MA. “They want their fresh produce chopped, cut, shaved, ribboned, or spiralized. We stock items such as butternut squash ribbons, shaved Brussels sprouts, sliced beets, and chopped cauliflower.”
Small format shoppers also expect to find fresh-cut fruits and vegetables. Chains such as Sprouts aim to reduce work for the consumer by offering more grab-and-go produce. The Fresh Formats stores feature both popular cut fruits and vegetables and more unique offerings such as peeled clementines, pomegranate arils, and jackfruit segments.
Grower/shippers are responding to the consumer’s need for convenience. “Market Fresh added convenience-oriented variations to our packaging that are well-received by both retailers and consumers,” explains Kaylyn Bender, marketing manager, Market Fresh Produce, Nixa, MO. “Items such as Tomato Tots, two-pack peppers in all colors, two-pack zucchini and yellow squash, and packaged green beans are growing in sales. These enable retailers to carry fewer options for the same produce item, cutting down shelf space and reducing waste.”
Discounters Continue To Dominate
Cornell’s Drake predicts the discount sector will dominate small format, with rapid growth of Aldi and the expected market entry of Lidl. “We will have thousands more discount stores in the next decade, with Aldi in particular expanding and doing fabulously. Its fresh produce department is attracting people to the stores.”
U.S.-based Grocery Outlet Inc., Emeryville, CA, a small, limited-SKU, local discount retail store with 235 independently owned stores in California, Oregon, Washington, Idaho, Nevada and Pennsylvania, took over a number of former Fresh & Easy locations. The retailer’s philosophy is based on deep discounting through a combination of “Every Day Fair Pricing” and “Fresh Bargain” buys.
“For example, we partner with grower/shippers to help them move whatever size and grade produce they need to move fast,” explains Scot Olson, director, produce and floral for Grocery Outlet. “This helps the grower, and in return, we get better pricing to pass onto our customers.”
Private-label cuts costs, enabling retailers to reduce prices. “Trader Joe’s and Aldi grew sales by relying on private label to keep costs low,” explains Barrett of Euromonitor. “Private label store brands give retailers more leverage on pricing. If the retailer doesn’t like the pricing of a name-brand product, the store can replace it with its own private label.”
An Outlet For Organic
“Trader Joe’s has grown its organic section at a price point that’s about as cheap as you can get,” says Barrett. “Customers can buy organic without breaking the bank, and also enjoy the whole Trader Joe’s package of healthy, quirky food, local tastes, small batch, and uniqueness.”
At Brothers Marketplace, fresh means local and organic. “Local farm-to-table produce is growing and will continue to grow in 2016, and organic is here to stay,” says Brothers Marketplace’s Winship. “Brothers Marketplace is fortunate to have local farms that supply organic produce. We also have strong and lasting relationships with community farmers. Some farms even plant certain crops for just our stores.”
Organic is also a growing segment for discounters, notes Olson of Grocery Outlet, who explains shoppers on a tight budget still want to eat healthfully and live a healthier life. “We market our organic produce under the umbrella of ‘NOSH,’ which stands for Natural Organic Specialty Healthy. This company initiative ties organic produce with other natural and healthy choices throughout the store. Even though we are a discount retailer, we still carry quality healthy products.”
Small Format Engages Employees
Small format stores, by nature of a more intimate size, encourage interaction between store employees and customers. An online review of one retailer commented: “Clearly [the store] has gone out of its way to find excellent employees who genuinely understand good customer service. They’re engaging and friendly.”
Brothers Marketplace educates its associates to answer a growing number of customer questions about their produce, where it is grown, and how to use it.
Sprouts team members promote fun fruits and vegetables, says Romero from Sprouts, and will cut them open for shoppers and children who have never seen or tried them.
“Too much choice is overwhelming to shoppers; we call it tyranny of choice,” says Drake, of Cornell University. So although small formats offer less variety, “consumers appreciate when retailers curate choices for them.”
Brothers Marketplace is proud of its curated selection of specialty items. “We feature unique and trending produce items that other supermarkets don’t have, including heirloom local apples, baby-colored cauliflower, Tongue of Fire beans, and piri piri peppers,” says Winship.
Success In The U.S.
Small format retailers may be here to stay, in part because of the sharing economy, notes Gross. “Large markets and big box are dependent on car ownership, which is going down among some segments. Retailers are building new networks in small format. They can’t build big and expect the same growth. Big box retailers and large grocery chains are likely to continue closing and consolidating. They can’t grow if they don’t have e-commerce and small format.”
Small format success, however, is far from guaranteed. “For the most part, conventional supermarket entrants are not doing well, because it’s hard to compete with industry leaders like Trader Joe’s,” observes Livingston of DJL Supermarket Location Research.
Brands can’t expect to attract shoppers based on large-chain reputation. “Small format retailers need to build trust,” says Cornell’s Drake. “Aldi, Trader Joe’s, Lidl, and Save-A-Lot occupy a unique niche. For others, a larger format brand reputation may not translate into a smaller store, and small stores don’t run on the same economics as larger stores.”
Catering just to Millennials leaves others unserved. Drake notes, “changing demographics will impact small format. The American consumer population is aging rapidly. Retailers need to modify what they do to make it easier for older adults to shop.”
Internet Shopping – Friend Or Foe To Small Format?
The growing popularity of online grocery purchases is changing the shopper-
supermarket relationship. Because Internet retailers excel in non-perishables, shoppers can purchase most of their staples and bulk items online, and then fill in with fresh items from the market. Small format retailers typically dedicate a larger percentage of the store to fresh items and less space to traditional center-of-the-store grocery items.
The Internet does pose a threat to small format retailers. In a 2015 A.T. Kearney report, “Capturing the Online Grocery Opportunity,” two-thirds of respondents said they would buy more groceries online if quality and freshness could be guaranteed.
Some small format retailers are marrying in-store with online. “E-commerce is available for Everything Fresh and in development for BFresh,” says Suzi Robinson, Fresh Formats spokeswoman, Canton, MA.
“Sprouts is currently testing online shopping,” says Diego Romero, corporate communications manager, Sprouts Farmers Market, Phoenix. “For one of our Southern California stores, we have an exclusive relationship with Amazon Prime Now. Shoppers can use the Prime Now app to choose from 4,000 fresh, natural and organic Sprouts items. Their order gets delivered within two hours free of charge or within one hour for a small fee.”
Delivery logistics foster innovation and offer opportunities. “Whole Foods partners with Instacart as its logistics intermediary. The Instacart driver calls the customer from the store to arrange pick-up and drop off; and Amazon Locker currently partners with 7-Eleven as a delivery location in urban centers,” says Chelsea Gross, analyst, RetailNet Group, Waltham, MA. “Some small format retailers are incorporating pick-up centers. Target Express click-and-collect enables shoppers to order online and then pick up their order in a designated section of the store. This offers an opportunity to shop for fresh items when getting their order.”
“The big question is what effect Internet shopping will have on small format retailers,” notes Bill Drake, director of Executive Education, Food Industry Management Program, Cornell University, Ithaca, NY. “E-commerce is making the biggest inroads in urban markets, where consumers do not hesitate to buy fresh produce, dairy, and meat online. Internet retailers are developing ways to communicate freshness by tagging online produce items with stars based on how good they are.” Drake predicts e-commerce will not capture more than 6 to 7 percent of the market, because consumers continue to be interested in the food experience.
Pond-Hopping For Predictions
What is the future of small format retailers in the U.S.? It may be instructive to look toward the U.K., where discounters Aldi and Lidl are well established. In a December 2015 presentation at the fifth Annual Global Trade Symposium at the New York Produce Show and Conference, Simon Martin, sales and marketing director, QV Foods Group, Spalding, U.K., noted Aldi and Lidl exhibit strong growth, forcing large retailers to cut prices in order to compete. Still, large stores face declining sales and market share and are closing locations. He also reported fresh sales are losing share to prepared meals and meal solutions.
Pick-up and delivery options are likely to change. “In areas with a high percentage of car ownership, stores may replicate the drive-through markets popular in France,” predicts Chelsea Gross, analyst, RetailNet Group, Waltham, MA. “Some drive-through locales allow shoppers to examine the produce they order online before buying it.” Gross also expects home delivery to continue to grow, as long as quality matches consumer expectations.
American shoppers differ from European shoppers, however, and a successful European small-format retailer must meet the needs of the American shopper. Among the factors attributed to the failure of Tesco’s Fresh & Easy are packaged produce options, unappealing store format, a product mix that didn’t meet shopper needs, and undesirable locations.
“Fresh & Easy couldn’t have picked worse locations,” observes David Livingston, president of consulting firm, Milwaukee, WI-based DJL Supermarket Location Research. “The priority was to open a lot of stores anywhere instead of opening just in good locations. The types of locations that work in Europe don’t work in the U.S.”
The Perishable Pundit and Produce Business editor-in-chief Jim Prevor enumerated additional reasons for the failure of Fresh & Easy in a January 2013 Perishable Pundit article. He said the chain launched during a difficult economy and Americans were not yet ready for a small format retailer. Fresh & Easy was destined to lose money whether it opened stores quickly in sub-par locations or opened them slowly because of its large capital investment. Parent company Tesco stocked stores with its unknown private label products. All stores, whether in affluent or low-income areas, stocked the same product assortment. In produce, large supermarket chains offered lower prices than did Fresh & Easy.
“Americans have different demands regarding fresh,” says Bill Drake, director of Executive Education, Food Industry Management Program, Cornell University, Ithaca, NY. “Europeans are ahead of us with prepared and semi-prepared foods, and with pre-packaged ingredients. Europeans are more accepting of discount formats, as evidenced by Aldi and Lidl recently obtaining 10 percent of market share in the U.K. The U.S. also differs in its vendor-retailer relationships for supply and pricing.”
“Small format stores are not likely to be as popular here, because we don’t have the population density and European mindset for daily shopping,” observes Dick Spezzano, president, Spezzano Consulting Service, Inc., Monrovia, CA. “In Europe, store items are so fresh that they run out daily. Americans expect a fully stocked store at 10 p.m. and might not tolerate low supplies if they shop late at night.”