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Food For Thought

Grocery store dynamics provide a revealing window into an economy in transition

By Howard Paster, hp@pasterent.com

Throughout my commercial development career, grocery-anchored shopping centers have occupied a particularly important development category. As commercial assets go, I’ve found small and mid-sized grocery-anchored centers to be one the more stable commercial assets, and it is my firm belief that the grocery element in that retail equation has a lot to do with that stability. The nature of the grocery/supermarket sector tends to make these projects relatively resilient; if not recession proof, then certainly somewhat recession resistant. Families will always need to put food on the table, and part of any economic downturn is the logical desire to save money by eating out at restaurants less often and doing more cooking at home.

What is particularly fascinating to me is the way in which a detailed examination of the grocery sector can provide some interesting and important insights into the larger commercial development marketplace. In some ways, grocery gives us a valuable window into the current social, cultural and economic dynamics at play in the world of retail. Today, as the grocery marketplace becomes more competitive and more diverse, as new brands enter and old brands take on new identities, evolving patterns reveal new facets in the shifting industry.

Grocery doesn’t just take a pulse; it takes a picture. Here at Paster Enterprises, where we have recently opened an Aldi supermarket, are currently building a new Whole Foods Market and recently acquired a Cub Foods-anchored center, the contours of that snapshot are particularly well-defined. By looking at the current state of the various supermarket categories–from discount to full service and high-end/premium–and the ways in which consumer behaviors are both impacting and gauging the relative success of those segments. What follows is a brief look at who is doing well (and why), who is doing poorly (and why), and what that might mean for the industry as a whole as we continue to emerge from a sustained economic downturn.

Discount
Discount or value grocers like Aldi are seeing improvement and generally solid to strong performance. Part of that can probably be attributed to better market presence and critical mass in some key markets, as well as a stronger commitment to print and TV advertising, but I think there is more going on here as well. The current successes in this sector might be an indication that some consumers are “trading down”: looking for more bargains and greater value at discount destinations. The big question is whether that trading down is happening within the same store (i.e. buying generic and grocery brand products instead of name-brand) or is driving traffic from one grocery sector to another. Is the success of the discount grocer coming at the expense of the higher-end grocers and specialty markets, or is someone else feeling the pain?

Premium
A familiar name and the industry leader in the premium grocery segment, Whole Foods Market continues to strengthen its market presence here in the Twin Cities, and is generally performing well nationwide. What is interesting to me is the degree to which Whole Foods–and to some extent other high-end grocery chains as well–have worked to shed their high-price/luxury image and rebrand themselves as providers of organic products at affordable prices. While that flexibility and foresight has seemed to work, I think there are additional structural reasons behind the brand’s performance. Whole Foods’ acquisition of Wild Oats has helped refocus the brand’s attention on the profit and performance potential of smaller store footprints. As Whole Foods moves into smaller store models and smaller floor plans, that opens up a lot more markets and creates additional expansion flexibility. Additionally, the “let’s save some money and buy something nice to cook/eat at home” phenomenon has probably been an especially potent dynamic at high-end grocers. It’s likely that prepared foods and other still constitute a “treat” in the minds of consumers, making the premium grocery stores a popular restaurant substitute.

The other guys
Unfortunately for those traditional grocery brands without a strong identity as either discount or premium, they appear to be somewhat caught in the middle; profitability seems to be getting squeezed at some traditional grocery stores. With increasing competition from large deep-discount retailers like Wal-Mart, Sam’s Club and Costco (and to some extent even convenience stores, which continue to offer an expanded selection of grocery options) and a bigger long-term trend toward more fresh, organic and prepared foods, traditional grocers are getting pressured from both ends of the grocery spectrum. In some respects, the very definition of what constitutes the middle has changed. The “new” middle is made up of brands like Cub Foods; names that used to be considered discount, but have perhaps lost some of that defining identity as the big-box discounters move in with aggressively low price structures.

The big question is what happens now; where do we go from here? Changing patterns of consumer behavior and consumer spending, and subsequent adaptations on the part of grocery brands in all market segments, continue to act as a kind of social and economic barometer. Going forward, it will be interesting to see if a real trading down trend solidifies, or if what we are seeing is more of a “cross-shopping” phenomenon. In other words, are people going from Whole Foods to Cub Foods, or from Whole Foods to Trader Joes? I think shoppers will continue to be more price-conscious and brand conscious within the store; in effect making a more concerted effort to get more for less. The fact that a brand like Whole Foods has actually gained sales despite ongoing economic uncertainty in the marketplace seems to indicate that there might not be quite as much consumer mobility between grocery segments as some industry observers might have previously assumed. While traditional and mid-level grocers have taken some steps to broaden their offerings by doing things like adding organic sections, that has not had a particularly strong impact as of yet. Consumers who value organic foods are likely still going to go to Whole Foods and other premium brands. Finally, it’s important to remember that grocery volume overall has shown no real signs of accelerating in recent months; so while things might be better, they aren’t back to normal. And like other commodities, food prices seem likely to rise in the relatively near future, and that is something to watch for also. With more price pressure, and with more specialty and niche providers popping up all the time, competition for grocery dollars is fiercer than ever before. It is a dynamic that will likely continue to make grocery one of the most fascinating–and revealing–retail categories in the months and years ahead.

Howard Paster, is president of St. Paul, Minn.-based Paster Enterprises, a family owned leader in shopping center management and development throughout the Twin Cities. For more information, visit pasterenterprises.com. He can be reachwed hp@pasterent.com.