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The Recipe for Successful Alternate Format Grocery Stores

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In today’s rapidly changing retail landscape, it’s no wonder that one of the most basic human needs—food—is undergoing the biggest transformation. Traditional grocery is at the heart of the changes. Since 1988 it has seen its market share shrink from 90 percent to 44 percent.

A couple of key points underpin this shift, namely the rise of subscription delivery meal kits and the increased frequency of eating out. In fact, a 2018 Zagat survey found that Americans eat an average of 5.9 meals out each week—almost one meal per day.

Small wonder, then, that the traditional grocery store is bearing the brunt of these changes. But don’t write the obituary just yet. Traditional grocery remains the primary destination for food shoppers. And unlike other industries that have watched disruptions eat away at market share before ultimately succumbing to the wounds, brick-and-mortar grocers are innovating in new and interesting ways that capitalize on today’s trends.

Here are a few things they’re testing:

 

Improved Convenience

Smaller is better. Gone are the days when shopping meant half a day pushing a cart the size of a small bus. Instead, consumers shop around; according to the Food Marketing Institute, the average consumer visits 4.4 stores per month. With shorter, more frequent trips, convenience is king.

In this area, few do it better than c-stores, where one can get a quick lunch, snack or fresh cup of coffee—all in the time it takes to pump a tank of gas. And they have been rewarded with a larger slice of the grocery spend. C-stores captured about $201 billion in food and consumables sales in 2018—about 16 percent of the dollar share.

Traditional grocers are responding by taking what’s best about c-stores: convenience. Small format grocery stores like Whole Foods Daily Shop, Hy-Vee Fresh & Fast and Kroger Fresh Eats MKT combine the best of traditional grocery with the convenience of c-stores. Not only can shoppers get the prepared meal or coffee, but they also can grab a few staples for tonight’s dinner. It’s that latter point that may give them an edge on c-stores.

It should be noted that retailers of all types are going with the smaller footprint, more convenient store.

 

Focus on Fresh

Small format grocery stores have another leg up on your average c-store, one that hits on a separate trend: fresh. Stores that focus on fresh, including GIANT Heirloom, are seeing a rise where traditional grocery dips. In 2018, these stores saw 3.6 percent growth.

Fresh is a key to future success, according to Nielsen research. Perimeter shopping—where fresh food areas like bakery, deli, meat and produce reside—is what drives shoppers into a physical store.

Some stores are even converting part of their operation into actually growing the food. H-E-B’s Central Market is experimenting with a “growtainer” that produces herbs and leafy greens right in the store. It’s labeled with “store-grown produce” signs. Hy-Vee includes hydroponic grow walls outside some of its stores.

Of course, one of the challenges with fresh is perishability, a key contributor to grocery store shrink. But technology is helping grocers overcome this. Stop & Shop, for instance, has risen to the challenge with a bread baking robot. The “breadbot” bakes 10 loaves of artisan bread per hour, from scratch. Since the bread is sold the same day, it has no artificial preservatives.

 

Ready to Eat

Prepared meals now mean far more than a pre-packaged dinner to throw into the microwave. Today’s grocers are offering unique dining experiences in a trend called “grocerants.” In vogue for just a few short years, this has grown beyond fresh-baked pizza and burgers and to upscale and niche. Canada’s T&T Supermarket, for instance, has incorporated food service into each of its 11 stores, but each captures local flavor. In Vancouver, customers can select prawns, clams and lobster from fresh tanks. The food is cooked and served on the spot.

Deli-prepared foods are also on the upswing, up 6.4 percent since 2015. Ready-to-eat, grab-and-go foods are the most popular, followed closely by heat-and-eat, grab-and-go. Kowalski’s Markets moved much of its prepared deli foods to self-serve, allowing customers to pick exactly which combination of its Drummies—the drum portion of the chicken wing—it wanted. When it moved the popular item from behind the glass, some stores saw sales increase 400 percent. It saw a similar jump when it moved a burrito bowl station from behind the deli counter to the end of the salad bar.

It’s worth noting that restaurants aren’t taking this trend lying down. Fast-casual salad spot Sweetgreen has opened a year-round farmer’s market in Washington, D.C. Tavern sells products from the same farmers who supply its restaurants. And Chicago-based smoothie and juice company Real Good Stuff Co. has opened a corner store concept featuring grab-and-go items as well as retail versions of some menu items like local cheeses and produce.

 

Skip the Garnish

It might seem that small format grocery stores are decidedly upscale. That’s not always the case. Three small format grocery store chains are opening new stores rapidly. All three focus on bargains. Grocery Outlet is a small format store focused solely on price, largely featuring name brands with excess inventory. Two Swedish imports—ALDI and LIDL—feature more private label store brands. All three retailers, however, feature rotating stock—meaning customers are never sure exactly what will be in store. And all three pack these into small spaces.

These stores may be out ahead of a trend that will affect grocers more broadly—and that’s not good news for consumer-packaged goods. When considering smaller formats, a focus on fresh and room for restaurants, something has to give. And that may be options. Instead of mayonnaise in a number of sizes, flavors and brands, ALDI and LIDL will have one or two options. That is a trend that more grocers are expected to follow.    

 

Alternate Delivery Methods

A customer pushing a cart through a store to gather groceries —no matter how small the store—is from a bygone era. These days, grocers are getting products into the customer’s home no matter the method. Kroger has been testing autonomous vehicles and shipping of staples directly to the home. Others have tried delivery, either through their own services or by partnering with a delivery company like Instacart or Shipt.

But the big trend—and the biggest potential impact on store design—is click-and-collect. This is where a customer places an order online and then pulls into a designated spot at the store to pick up the order. At Hy-Vee, the entire process is moved offsite into bright red lockers. Customers place the order, receive an email with a PIN and barcode, and visit the Aisles Online locker at the selected location to gather their groceries.

This new reality is driving redesigns, as well. Smart & Final stores removed its snack aisles from the front of the store, replacing them with freezers to accommodate click-and-collect orders.

This may be just the beginning. Some industry insiders anticipate grocers focused on click-and-collect or home delivery will continue to remodel stores as a way to improve speed of shipping. These so-called “dark stores” allow grocers to fit more items since there are no points for neatness and no need to keep all boxes facing front. Stores can be remodeled to support various needs: delivery drivers, click-and-collect shoppers, and the traditional shopper.

 

Full-Service Experiences

Staples like toilet paper and canned goods can be auto-shipped directly to the home and basics can be ordered online and collected at the store. Getting a consumer to step foot in the store now requires a destination, an experience. And some groceries are attempting to deliver that through expertise and events.

ShopRite’s “state of the art” store includes a culinary center for cooking classes and a registered onsite dietitian to provide nutrition counseling. Giant also has added a nutritionist to some of its stores. Metropolitan Market offers culinary classes, including those on techniques like improved knife skills. Full-service butchers are making a comeback, as well.

No matter the size of the store, though, building an ongoing relationship with the customer comes down to expertise in products. Grocers once tried to be all things to all people—offering every brand conceivable. Small format grocery stores don’t allow that. Successful grocers will respond by becoming experts in the products their customers want.

 

CB4 helps ensure that the products your shoppers want at each location in your chain are in-stock, on the shelf, and ready to sell. Watch this video to see how it works. 

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