BY Neil Stern

There are many fine convenience chains in the United States and excellent examples of evolved models that have managed to combine convenience attributes with highly credible foodservice offers. Chains such as Wawa, Sheetz and Quik Trip succeed admirably with excellent operations and expansion into categories such as beverage and foodservice.

But the convenience store format has moved well beyond the traditional model in Europe, and especially in the United Kingdom. The staggeringly compelling Simply Foods from Marks & Spencer is one of the more unique and best-executed retail concepts we have seen, a format focused on serving consumer’s meal needs through a 100% private-label effort. Established grocery retailers such as Sainsbury and Tesco have built effective models, scaling back their grocery ranges to serve the needs of local markets. In Asia, convenience stores are supply chain marvels, with multiple daily deliveries that allow the transformation of format by time of day.

We now believe that convenience in the United States is nearing an impending inflection point. Forces from inside and outside the market promise to reshape how U.S. consumers will shop in the next decade.

This article is dedicated to exploring some formats that will shape that trend. As is often the case, a confluence of new formats and new ideas promise to be a wake-up call for this industry. From the meal-driven Really Cool Foods to a new format from Tesco, convenience in the United States may never be the same.

Really Cool Foods

Component Cooking?

Convenience is not a format—it’s a market-shaping trend. New concepts are being developed that defy conventional description. Even the names for these new formats are a struggle. Really Cool Foods is one example. It’s not a traditional grocery or specialty food store, but it’s not a traditional convenience store, either. It offers convenience—specialty organic/natural foods and fully prepared meals for immediate consumption—but it also offers component cooking (organic or natural meals that are prepped and ready to go for cooking at home in 20 minutes or less). This differentiated offering appeals to people who want healthy, home-cooked meals, but don’t have the time.

Unique concepts and innovative formats are transforming the convenience store industry. This special report, reprinted with permission from Retail Watch, takes an indepth look at some of the new, exciting players from around the globe that are reenergizing the traditional convenience model.

Really Cool Foods’ debut store, located on Third Avenue in Manhattan, lives up to its name—it is really cool. We were impressed with the food, the store, the beautiful design, and the look and feel. Not only is it spacious and bright, with 4,300 sq. ft., its large cooking area in the center is like a stage—an attraction that draws customers in to see what’s happening.

There is a professional chef cooking on multiple burners, with a neat display in front of the burners providing a display of all the ingredients needed to make each dish. Better yet, there is also a sampling in front of the products for customers to taste. The cooking stage allows the chef to demonstrate how to quickly prepare great-tasting food, giving the store instant credibility and authority on how to prepare a meal in 20 minutes or less. It looks easy, with the solution provided front and center. The chef cooked and explained how the meals were prepared. She also described variations to how the meals could be made at home. It was encouraging, and we were advised to switch out and test different ingredients based on our individual tastes. The opportunity for customization and a sense of personal satisfaction came right along with a tiny, tasty food sample.

While it was fun to graze and taste-test throughout the store, another useful feature is the to-go bags (“dish kits”), with prebagged recipes that have been assembled with all the ingredients for those on the run. The bags can feed three to four people, cost $12 to $15 per person, and offer a variety from which to choose. All of these pre-bagged meal-at-home kits take less than 20 minutes to make and they’re well-packaged, signed and displayed under the Really Cool Foods (RCF) label. RCF also sells a private-label line of premium chocolates and a “drizzle” line, which can be used in stir-fry dishes or as salad dressings, too.

Recipe cards are available via in-store displays. A customer can choose a recipe card and find all of the ingredients or components in the store. The store color-codes ingredients for shopper ease, and reinforces customer customization and personalization. Giving the customer control in the cooking process appears to be part of the store’s philosophy.

Organic meats and vegetables have been pre-cut, sliced, seasoned and packaged into portions that serve up to four. There’s a variety of premium cheeses, pastas imported from Italy, natural and organic pet food and baby food, and a small variety of pots, pans and other kitchen necessities. An in-house bakery with more than two-dozen specialty breads is also featured. There is a strong sense of authority and credibility in Really Cool Foods because of the way it displays, signs and sells its product. It is great at providing the whole solution, and communicates a distinct message around “healthy, quick and easy, and tailored for me” which really comes to life in the store.

Our troubles with Really Cool Foods belie the issue of communicating a new concept to consumers and determining how those customers use the concept in their lives. The name Really Cool Foods does not convey to a customer what the end promise is. It also is not clear how the store will function in their lives. It takes the food experience and whittles it down to two sub-sets: component cooking and organics. While both of these may be compelling trends, we’re not sure that they naturally go together. We have not seen much traffic in the stores, confirming our suspicions that using this store requires the retraining of consumer behavior over time—a luxury that not all new concepts have.

This is an extremely well-executed new format that shows sophisticated planning and attention to detail. We hope it can quickly find its target customers and establish this niche.


Upscale Convenience With Asian Influence

Famima is an upscale convenience concept brought to the United States from Japan’s No. 3 convenience store chain, FamilyMart, which owns 12,450 stores, half of which are located in Japan. As part of its quest for expansion, Family-Mart has opened 12 Famima stores in Southern California since 2005.

The store we shopped was the “landmark store” at 1348 Third Street Promenade in Santa Monica. It is in a prime location, right at the heart of an acclaimed, pedestrian hot spot where a large Asian population resides.

Famima’s store design is clean and simple, with an upscale feel created through hardwood floors and stainless-steel counter tops. The hardwood floor covered a majority of the roughly 2,000 sq. ft. of space, while tiles outlined the refrigerated cases. POS screens face out on the long, wide customer checkout counter, which gives customers a sense of control in their purchase process.

Famima is clearly differentiated through its offering, which included:

Asian staple foods such as sushi and rice balls, noodle bowls and Chinese buns;

Afriendly associate who actually served us fresh, hot, prepared samples of their grilled panini sandwiches and soup;

Avast assortment of high-end bottled waters, teas, energy drinks and specialty Asian beverages;

Sweet treats such as soft-serve ice cream; and

Fun and colorful stationery items plus daily and international newspapers and magazines.

The merchandise mix of Asian products, traditional c-store items, and hot prepared deli food seems to work well because of the way it is brought together. Fresh panini sandwiches, hot coffee, soda, cookies and chips, with an ATM near the front and a noticeable display of cigarettes behind the counter, make it credible as a traditional c-store. The Japanese product mix comes as a surprise for a customer that has never seen or bought Asian products before. Famima does a nice job using signage to educate shoppers and promote unfamiliar items.

We give it credit for creating a unique position and for establishing authority around good quality and convenient Asian foods and products. Digital-photo-processing kiosks, copier services and Internet access are a nice added touch. Famima comes together as a fresh, edgy and different kind of convenience store.

Our major complaint was that the store was low on stock (almost empty) in the refrigerated-meals-to-go section. This might have been due to the time of our store visit, but it is still a big concern when it comes to having convenient, quick, quality food ready for a crowd that’s hungry at nearly 5 p.m. after strolling the Promenade.

Overall, this U.S. version of FamilyMart stores functions partly as a quick-service restaurant, convenience store and specialty Asian grocer. The company targets Asian Americans, Asian travelers and women, and we believe it is well-positioned to succeed in the California market. This thinking was supported by the long line of mostly Asian customers waiting to buy products, plus a decent mix of younger Caucasian male and female customers, too. It remains to be seen whether this concept can be rolled out nationally, where the Asian influence or population may not be as strong.


Organic Convenience Tailored to Kids and Busy Parents

Kidfresh is a natural-food store with freshly prepared meals-to-go for kids. The founder, ex-consultant Matt Cohen, designed the concept because he was disappointed with the existing food options for his kids. In January, he opened Kidfresh in Manhattan. Its fresh, organic, convenient, made-to-go meals appeal to busy parents who don’t have the time to cook but still want their children to eat nutritious meals.

The store is located on the Upper East Side of Manhattan. It stands out with a colorful front door for grown-ups and a special entrance on the side for kids. The interior is well-lit and clean, with bright green, orange and yellow colors throughout. There are small grocery carts available for kids and taller ones for moms and dads.

The store, about 1,500 sq. ft., is easy to navigate, with clear, direct signage and labeled zones that include a Kidfresh bar, Grab & Go and Mix & Match (refrigerated cases with prepared meals), a Baby/Organic/Lifestyle section, a “Kidschen,” and finally a dining and playroom area in the back. Here’s how it stacks up:

The “kidfresh” bar, located in the front across from the checkout area, allows kids to walk up to the bar and order goodies. Kids can pick a shape to customize their sandwich order into a “Shapewich,” choose from an organic-fruit smoothie or fruit stick and order a cupcake or ice cream;

In the refrigerated cases where the Grab & Go foods sit, there are convenient, specially proportioned, color-coded, boxed packages with lunch boxes, breakfasts, snacks and dinners. The green boxes are for Kids (6-10 years), red boxes are for Juniors (3-5 years), orange Minis for the toddlers (1-2 years), and yellow is code for Babies (0-1 year). Kidfresh’s version of healthy “lunchables” include things such as star-shaped pancakes with homemade chocolate dip for breakfast, turkey and cheese kebob with honey-mustard dip for lunch, and honey teriyaki chicken tenders with rice and edamame for dinner;

In the Mix & Match section, kids can customize their meal by choosing a main, a side and a dessert. Mix & Match items are merchandised next to the Kidfresh line of bottled water, appropriately packaged in childsized bottles. There is also a small section of healthy grocery items, mostly drinks and yogurt. Organic baby foods and fun food games such as pretzel-making kits are also available;

In the rear of the store, just before the “kidschen,” there’s a sink for kids to wash their hands before dining and playing. The colorful dining room has seating along the wall and fun activities, such as coloring, for kids; and

The “kidschen” is sectioned off by glass where a chef can be seen cooking, tossing and prepping food. Meals are prepared fresh-made-to-go using preservative-free and organic or natural foods.

The Kidfresh team understands how to create a store for kids with the intention of health and wellness of children in mind. Their team includes a chef and dietitian as well as a pediatric nutritionist, a former Dannon food-marketing executive, and a former marketing executive for Ralph Lauren Childrenswear.

While the concept is unique, fun and perfectly tailored to kids, the niche feels a bit too narrow to drive the necessary economics associated with a capital-intensive endeavor. We like the way the company created a store that makes shopping fun and educational for kids as well as convenient for parents. However, the profitability of the store and whether or not it is scalable is questionable.

Café W

Walgreens Brews Convenience

Late last year, The Walgreen Co. launched its in-store Café W concept in several locations including Chicago; Wichita, Kan.; El Paso, Texas; and Colorado Springs, Colo. Café W is a self-serve coffee bar offering coffee drinks, fountain beverages, fresh sandwiches, salads, pastries and snacks for customers on the go.

We visited Café W in Chicago on Michigan Avenue and Washington Street. The name is certainly a bit misleading, as there is no seating at this cafe. It’s basically an 8-ft.-long aisle toward the front of the store, with a self-serve coffee end cap and a couple of well-merchandised displays. A neat and clean beverage station faces front with a Maxwell House Café Collection machine that produces various coffee drinks—including lattes and cappuccinos—followed by drink stations and fresh food merchandised in the aisle on the fixtures.

The drink stations behind the coffee bar include Flavor Fusion and Icee machines. And just after the Fountain Favorites, a small refrigerator sits on the shelf (away from the refrigerated cases) with cold sandwiches, salads, and yogurt/granola snacks. The sign reads, “Good Food Fast…Fresh Sandwiches, Salads and Pastas Delivered Every Morning!” Among the choices: turkey breast with lettuce, tomato, provolone cheese and pesto mayonnaise on herb focaccia bread, or chicken salad made with wasabi mayonnaise on nine-grain bread. Located nearby is a display with grab-and-go gourmet snacks that include almonds, cashews and other nuts, dried fruits and candies for 99¢.

Finally, the aisle is boldly capped with fancy signs that read “Walgreens Café W.” While its theme is a bit classier than “Big Brew” or “Big Gulp” from 7-Eleven, it is still a very obvious test that indicates Walgreens is akin to a convenience store and not just a simple drug store. It seems to be carefully experimenting with its ability to serve the time-pressed customer’s immediate need for beverages and foodservice.

Café W is more of a frontal assault on the convenience market that Walgreens has been courting with its front end for years. The company is both known for its experimentation with new ideas and its extreme conservative approach to rollout. We are not sure whether this is the right answer for Walgreens, but targeting the high-margin, high-traffic components of a convenience store certainly seems to make sense.

Tesco Fresh & Easy

The British Are Coming!

Tesco’s planned entry into the United States with its Fresh & Easy format promises to be the biggest news in retailing in 2007. Certainly, it will be the most watched.

It has the right credentials and capabilities. Tesco is currently the fifth-largest retailer in the world, with more than $80 billion in sales spread over 2,800 stores and 13 countries. And, it is No. 5 with a bullet-projected growth that will have it exceeding $100 billion in sales by 2009 and trailing only Wal-Mart, Carrefour and The Home Depot. Wal-Mart will still have more sales than its next three largest rivals, combined.

More impressive than just size has been the manner in which Tesco has been successful. It has not only successfully defended and grown its home market in the U.K., but has also proven agile and adept in entering foreign markets in Asia and Eastern Europe. Rather than the one-size-fits-all approach of Wal-Mart, Tesco has made local adjustments as needed in markets as diverse as China, South Korea, Thailand and Poland.

The United States, of course, is another story altogether. It is the largest consumer market in the world and among the most competitive and diverse. Prior efforts by foreign retailers have met with limited success at best, particularly in food.

But none of those companies are Tesco, which is probably the best-run retailer in the world and a company that we greatly respect and admire. While the obstacles facing Tesco are considerable (no established brand, no established supply chain, unique habits of the American consumer), we have no doubts that it has considered them all—this will not be a poorly thought-out program. Already, tales of Tesco’s consumer research are reaching legendary status, from the prototype sitting in a warehouse to the extensive psychographic research done with American consumers. So are tales of supply chain development, where Tesco is working with established international suppliers to develop a U.S. presence.

The company intends to spend more than $2 billion in the next four years to establish a distribution center and several hundred stores. The exact numbers are not clear, although the company has announced that Southern California and Phoenix are the first areas of focus.

The planned launch of Tesco in the United States has been accompanied by much misinformation. Here’s what we know (and we’ll certainly know a lot more, when the first stores open later this year):

It is targeting about 12,000 sq. ft. Think Trader Joe’s or a Walgreens when visualizing this space;

It will not be a convenience store. The word “convenience” has a different connotation in the U.K. and refers more to a shopping occasion than a format. Expect customers to be able to complete a full grocery shop, from dry goods to perishables to prepared products;

Although the company says don’t think Trader Joe’s, we think it is a worthy comparison due to the heavy dose of private brands (not that heavy) and carefully edited selections. But, also think Whole Foods and better selections of perishables than Trader Joe’s offers; and

Look for British influence in ready meals. The U.K. invented the category of chilled prepared foods and does a brilliant job in sourcing, variety and product innovation. while the U.S. consumer may not be ready for the full spectrum of chilled meals, we do expect (and eagerly anticipate) category breakthroughs here.

Will Tesco be successful? It’s a company we wouldn’t bet against and the U.S. consumer certainly has embraced alternative grocery offers, from warehouse clubs to natural-foods stores to the quirky mix of a Trader Joe’s. Nowhere is this more evident than in Southern California, one of the key early markets.

The market is certainly big enough to absorb a Tesco. The U.S. grocery market is over $450 billion; Southern California alone produces about $40 billion in sales annually. If you figure that these stores could do about $10 million per location, the 200 planned outlets would contribute $2 billion in sales. Impressive, but the impact could be absorbed.


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BENTONVILLE, ARK. Sam’s Club is changing the management structure in its stores. In the realignment, approximately 250 positions will be eliminated, Wal-Mart Stores announced last week. The company said it’s replacing five lower level management positions at each Sam’s Club location with three new higher level and higher paying assistant manager positions.

“This is not a cost cutting effort. We expect a slight increase in payroll upon completion of this change,” said Sharon Orlopp, senior vp of Sam’s people division.

THE FIX: Differentiation would better help Sam’s

Since Sam’s decided that its refocus on the business customer was too narrow, it has sought to find ways to make its clubs more attractive to primary shoppers, i.e., women. And that’s a pretty tough row to hoe, as Costco has done a pretty good job at satisfying the club customer in general and BJ’s has been going after female shoppers for several years now, with some success.

Having fewer managers with more direct responsibility could create a tighter knit club-level management and shorten lines of responsibility and accountability. Yet, without differentiating the offering, execution isn’t going to overcome all of Sam’s challenges.

That being said, a store-level management realignment might be overlooked at other retailers, but, this being Wal-Mart, everyone has to make a big deal about it. But that’s the price you pay as the big guy on the block.


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WAYNE, N.J. Toys “R” Us today posted net earnings of $199 million for its critical fourth quarter, which meant it turned a profit for the fiscal year ended Feb. 3. But special charges and gains had an impact on its numbers.

Sales for the previous fiscal annum were $142 million, the difference translating into a net earnings increase of 40.1% year over year. For the last fiscal year, Toys “R” Us posted net earnings of $85 million versus a net loss of $384 million for the previous period.

Operating earnings in the fiscal 2006 fourth quarter gained 53.1% to $571 million versus $373 million for the fourth quarter of fiscal 2005. For the last fiscal year, operating earnings were $649 million versus an operating loss of $142 million for the previous period.

THE FIX: Improved shopper experience ups comps

Of course, any observer has to take into consideration special financial circumstances. Fiscal 2006 operating earnings were positively impacted by $96 million from gains on property sales, slightly offset by restructuring and other charges. In fiscal 2005, operating earnings were negatively impacted by $410 million in costs relating to the merger of the company, as well as $58 million of costs and charges relating to contract settlement fees, restructuring and other charges.

Still, sales were trending up at last year’s end. Net sales gained 15.8% to $5.7 billion. In the full fiscal year, net sales advanced to $13 billion, up 15.2%.

Comparable-store sales for the Toys “R” Us’ U.S. division gained 0.6% in fiscal 2006, and that represents the division’s first comps increase in six years. Comps at Babies “R” Us were up 4.8% and those at Toys “R” Us international were up 2.6% for the fiscal year.

Jerry Storch, chairman and ceo of Toys “R” Us, said the company is “pleased with the strides we made in fiscal 2006 to improve at all levels of the organization and reposition the company for profitable growth over the long term.”

He said the company’s new management team has been focusing on executing a strategy that would turn the retailer into a global toy and baby products authority.

“This translated into higher overall sales, positive comparable-store sales, improved gross margins and strong operating earnings growth for the 2006 fiscal year,” Storch asserted. “The key to our strategy has been improving the customer shopping experience in our stores. We are accomplishing this by delivering a more compelling merchandise selection, better service and a cleaner and more comfortable shopping environment.”


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