An Aisle for Every Shopper

In 1960, America was all about the traditional family who lived in the suburbs, watched "Father Knows Best" and faithfully shopped at National Supermarkets or A&P. Fifty-two percent of households were comprised of married couples with children and 88.6 percent of the population was white, according to the U.S. Census Bureau.

Fifty-three years later, a more diverse range of ethnicities and lifestyles in the United States has created a demand for food stores that serve a multitude of needs–whether shoppers are in a rush, looking for gourmet fare or seeking rock bottom prices. Retailers hope that by varying grocery formats, they can serve more types of shoppers. But the jury is out on which concepts will have staying power.

"Lifestyle diversification is a trend that's larger than the grocery channel," said Mike Paglia, principal analyst at Kantar Retail. "There's every possible lifestyle out there. When you see fragmentation among the consumer base, you see fragmentation of shopping habits, outlet selection, tastes and preferences. Retailers and suppliers are trying to come up with solutions and are often grappling with them."

Today, just 32 percent of households are made up of married parents with children and 72.4 percent of the population is white, said the U.S. Census Bureau. Household size has decreased from 3.65 people in 1960 to today's 2.58, with 28 percent of dwellings inhabited by one person–up from 14 percent in 1960 and 8 percent in 1940. More homes contain same-sex couples or are headed by single parents or two working parents than in previous decades. Hispanics alone accounted for more than half of the nation's growth in the past decade, according to the 2010 U.S. Census.

Growing urban populations and the ability to fit smaller footprints into tight real estate spots have led to an increase in small formats like CityTarget.

U.S. big box retailers like Target and Walmart are offering more grocery items than ever before, but traditional supermarkets remain the largest food channel. Other formats have eaten into conventional grocers' market share. Sales at traditional supermarkets climbed 4.4 percent in 2011 to $430 billion, while store count declined 1 percent from 2010, according to a June 2012 Willard Bishop LLC report, "The Future of Food Retailing." During 2011, sales at upscale fresh formats increased 11.4 percent to $10.4 billion. Limited assortment food stores (e.g., Save-A-Lot and Aldi) grew 5.6 percent to $26.6 billion, according to the report.

Walmart Express stores are opening in urban and rural areas that have traditionally had limited access to fresh food.

The Big City

In addition to emphasizing fresh food, many newer concepts target urban markets, which major retailers have historically avoided due to zoning restrictions and the high cost of real estate. But growing urban populations and the ability of smaller footprints to fit into tight real estate spaces is contributing to the rise of small-format stores in cities. According to the Census Bureau, the nation's urban population increased 12.1 percent from 2000 to 2010, outpacing the country's overall growth of 9.7 percent.

All Shapes and Sizes

Be it through acquisition or development of a new banner, some retailers are no strangers to the idea of operating multiple formats and store sizes. And some have even been successful. Here is a rundown of what various companies have been doing:

Kroger operates more than 20 banners that include everything from grocery and convenience stores to its Fred Meyer supercenters and Food4Less discount operation. Since 2000, it has been growing its 110,000-square-foot Marketplace concept, which is double the size of its Kroger grocery stores. Many stores under its various brands sell fuel.

In the mid-Atlantic region, $9.3 billion Giant Eagle owns supermarkets as well as GetGo, a 221-store convenience store chain. It also runs Giant Eagle Express, a newer, larger convenience store concept, and two discount grocery chains. In Pittsburgh, it has opened five stores under an upscale concept called Market District.

In the Southwest, H-E-B runs regular supermarkets along with Mi Tienda (Hispanic format), its foodie-driven Central Market, and H-E-B Plus, which carries food as well as the hardgoods and softgoods commonly found in discount stores. "They've had success with multiple formats and have been very aggressive about it," said Neil Stern, senior partner at McMillanDoolittle.

There is good deal of room for more discount supermarkets like Aldi and Save-A-Lot, which have limited offerings of top selling items at aggressive prices. They are also convenient in that they operate in smaller footprints than many supermarkets. According to a Willard Bishop Report, Save-A-Lot, which emphasizes private brands, plans to add 1,000 stores over the next three years.

In addition to traditional low income and price-conscious shoppers, discount supermarkets are attracting former high earners whose income was impacted by the recession. "While politicians don't talk about it, there's been more disparity in wealth," said David Rogers, president of DSR Marketing Systems. "That's why you have growth in formats at the two extremes, price-driven and upscale specialty."

Target has built CityTarget urban concepts in Chicago, San Francisco and Seattle offering fresh food, apparel and general merchandise in an 80,000- to 100,000-square-foot box that is about half the size of its remodeled stores.

In its annual report, Target outlined its strategy of meeting consumers' diverse needs: "We're making increased investment in delivering a superior brand experience that allows guests to shop where, when and how they like–and will attract more guests in 2012 as we open our new CityTarget stores."

Walmart introduced small format Express stores, a convenience-oriented concept, in July 2011. It currently operates 12 of them in Arkansas, North Carolina and Illinois. The stores are opening in urban and rural areas that traditionally have had limited access to fresh food and competitively priced groceries. Express offers about 15,000 SKUs, compared with the 100,000 available in Target Supercenter locations. Stores range from 12,000 to 15,000 square feet, include a pharmacy and offer fresh produce.

In March, Walmart plans to debut Express locations in four rural North Carolina communities. It also reportedly plans to open a 2,500-square-foot Express on the Georgia Tech campus in Atlanta in the second quarter of this year that will offer check cashing and bill paying. This will be Express' smallest location. Walmart opened an Express at the University of Arkansas in Fayetteville in 2011. The campus stores are part of Walmart's plan to test the Express concept in different types of markets, said a Walmart spokesman in the North Carolina newspaper Smithfield Herald.

Percent of Households with One Person: 1960 to 2011
Percentage Single-Person Households by Age of Householder: 2010
Source: U.S. Census Bureau, Current Population Survey, 1960 to 2011 Annual Social and Economic Supplements

Roundy's, based in Milwaukee and earning $3.89 billion in sales in 2012, is generating rave reviews with its eight Chicago-area Mariano's stores. Launched in July 2010, Mariano's bills itself as an upscale "fresh foodie" paradise of artisan breads, cheeses, seafood, wine, craft beer and produce. "It's big here [in Chicago],"said Dan Raftery, president of Raftery Resource Network Inc.

Ben Ball, senior vice president at Dechert-Hampe, describes Roundy's as a Whole Foods Market with a competitively priced center store. "Instead of kasha and vitamins, you get traditional Colgate and Campbell's Soup. It's like going to Whole Foods for food and Target for everything else."

Grand Rapids, Mich.-based Meijer, which opened it first Chicago-area store in Bolingbrook in 1999, also is targeting the Chicago market more aggressively. This past summer, it launched Meijer Marketplace in suburban Melrose Park. At 96,000 square feet, Marketplace is about half the size of Meijer's supercenters and includes what its website describes as a "tailored" grocery selection with a wide variety of general merchandise products along with Hispanic and Italian foods.

In October, Meijer announced it was purchasing a 580,000-square-foot distribution center from Supervalu in Pleasant Prairie, Wis., reported the Milwaukee Journal Sentinel. This will allow it to further expand in Chicago, where it currently has 13 stores, and throughout the Midwest.

The Proving Ground

Despite all the effort, some small-format stores have not met expectations. A case in point is Fresh & Easy, a Tesco-owned concept launched in the U.S. in 2007. The U.K.-based retailer studied the market intently before opening these mini grocery stores on the West Coast and in the Southwest. The original plans called for 1,000 locations. But the chain was beset with problems from day one.

Tesco "had bad timing and bad luck in where they decided to launch," said Garrick Brown, director of research at Cassidy Turley and national director of retail research for Chainlinks Retail Advisors Group. "They basically launched in some of the hardest hit markets about one year before everything hit" and the U.S. economy spiraled into a recession.

In addition, the stores only offer self-checkout. This limits payment options and is not conducive to large orders, said David Rogers, president of DSR Marketing Systems Inc. "The industry is experimenting with different formats. But this has been a conspicuous failure."

To date, Fresh & Easy has opened about 200 stores, short of the 500 Kantar Retail CEO Don Stuart estimated would be necessary to break even on the venture. Despite some improvement, Fresh & Easy lost 74 million British pounds in the first half of 2012, according to the company's half-year earnings report. In December 2012, Tesco announced it is conducting a strategic review of its business, and rumors flew that it might pull out of the U.S. market. Tesco addressed those concerns in February in an email stating it had no plans to close stores and signed, "The Fresh & Easy Team."

Some observers also have doubts about Walmart Express. While it shuttered a Chicago store, Walmart contends the location was too close to one of its Supercenters. Walmart might have trouble squeezing profits out of tiny stores given its everyday low pricing strategy, said Stuart. Traditional convenience stores, in contrast, sell merchandise at a premium. "It's hard to make a dent on a balance sheet if you're set up like Walmart," said Stuart. "They also eliminated many large package sizes, so they need to generate a lot of volume in a small store."

Stuart also questioned Neighborhood Market's success, since Walmart has been slow to expand it. "They've been in development for 15 years and are certainly not a national chain. Their requirements have been established in a world of supercenters, and they need to continually adapt."

Another problem is that small formats cannot affect the bottom line as much as larger stores. This could be a sticky issue for retailers whose shareholders are hungry for results. Hence, many companies have been slow to develop these concepts. "Nobody is going crazy with small formats, with retailers trying to figure out how to make them work," said Paul Weitzel, managing partner at Willard Bishop. "Returns are much smaller than on larger [stores], and they have a different economic formula. Wall Street is watching where you put your money."

Gary Stibel, founder and CEO of the New England Consulting Group, questioned whether the market can support all of the small formats run by big box chains. By operating too many formats, he said, a retailer can dilute its image.

"This is a tough environment with several things coming together at once–the explosion of the Hispanic population, men shopping for themselves, millennials and people who cook versus those who throw a frozen entrée into the oven. It has taken forever for supermarkets to understand market segmentation. But the biggest mistake a supermarket can make is to try to be all things to everyone. They must stand for something," Stibel said.

Rogers said retailers spend too much time worrying about formats, when they should be focusing on the products they offer. "We're all over the place. There's far too much faith in store designs and slogans like 'fresh obsessed' [A&P]. With fresh, there's often a lot of talk and no action. Customers are smart. Retail is much more about the basics of merchandising, pricing and knowing your customer."

Regardless of how they serve a diversifying population in the ensuing years, retailers must contend with the fact that the supermarket segment is mature. Regardless of format, the only way for a new concept or company to succeed is to steal customers from its neighbor. "The fresh markets are trying to do more," said Joseph Feldman, managing director and senior research analyst at Telsey Group. "But it's a zero-sum game that's all about capturing market share."

Is the Center Dead?

Center store hasn't changed in 50 years. You'll hear this common lament in the supermarket industry. But does it need to change? And if so, how dramatic must the changes be?

"I'm seeing investment in more consumer-friendly fixtures like bump-outs and gravity feeds," said Ben Ball, senior vice president at Dechert-Hampe & Co. "You can carve up aisles differently and do ethnic aisles. But how much can you really do to center store?"

He added that customers are more interested in the layout being accessible and simple to understand. They also want efficient checkouts and clean signage–and they do not care much if signage is digital, printed or even hand-lettered.

Dan Raftery, president of Raftery Resource Network, suggests retailers use skylights, good ambient lighting and practical merchandising fixtures. "There's a little comfort with something that's familiar," he added.

Neil Stern, senior partner at McMillanDoolittle, pointed to some merchandising innovation in baby, beauty and pet. "In some cases, they're opening up aisles so you have more room to shop, installing wooden displays and displays that are better organized around functionality. They are also putting in scented zones for baby and beauty, which creates an experience."