Howard Gerelick
Shopping center consultant, retired vice president of real estate, Safeway, Phoenix
Last year, I wrote about how many of the conventional supermarkets were building larger stores that offered more products in an attempt to compete with new retailers. While this was initially a successful defense, I did not think it ultimately would be the way to defeat these new enemies in the grocery war. Today, it’s rumored that Kroger, which was aggressively building larger stores, has put on hold on any new store development. Did Kroger stop building new stores because someone there read my article and agreed with me, or am I the Nostradamus of grocery war prophecies?
Regardless of my opinion, development of new stores by the conventional supermarkets has slowed, and many observers believe that conventional supermarkets face a new threat from internet giant Amazon with its purchase of Whole Foods. Will Amazon drop the A bomb, moving grocery purchasing online? I don’t think so.
Many companies have tried and failed to convert customers to online grocery shopping. The conventional supermarkets fought back by offering their own internet shopping and delivery or in-store pickup options. Amazon is not new to this either; the website offers grocery products to online shoppers and has started experimenting with brick-and-mortar stores called Amazon Fresh.
When you compare Kroger with Whole Foods, it become clear that the “conventional supermarket” still dominates. Kroger has 2,778 stores in 35 states compared to 438 Whole Foods stores in 28 states. The average store size for Kroger is 62,600 square feet, compared to 39,000 sf for Whole Foods. The average sales per sf for Kroger is $557 compared with $915 for Whole Foods. Of the estimated $649.1 billion in total food sales in the U.S., Kroger’s market share is 17.7 percent compared to 2.4 percent for Whole Foods. However, Whole Foods clearly is the dominant food retailer in the natural food sector with a 15.7 percent market share of the natural foods sales in the U.S.
Back to the battleground, the conventional supermarkets typically feature a larger army in terms of more convenient store locations that can offer more variety than an online retailer. So why is an online retailer’s purchase of a natural foods grocery chain causing so much speculation? The answer, I believe, goes back to 1980 when Whole Foods opened its first store. The opening created an excitement among consumers to buy products and prepared foods that were not typically available in conventional supermarkets. The diverse product offerings gave consumers a unique shopping experience. Even with its limited number of stores – making it less convenient than conventional supermarkets – and its higher prices – earning the nickname of “Whole Paycheck” – the chain developed an almost cult-like following from consumers.
I believe it is access to this consumer that Amazon hopes to capitalize on with its purchase of Whole Foods. Amazon now has a retail test tube to be innovative with and to experiment with new formats, integrating the brick-and-mortar shopping experience with the uniqueness of what internet shopping has to offer.
Can the conventional supermarkets fight this new partnership? Yes, if they recognize that they will have to make major changes to their store formats. These changes need to take advantage of their convenient locations and make the shopping experience more exciting.
Just as video stores and, later, online and on-demand availability of movies were projected to be the demise of movie theaters, theaters responded by adding better sound, seating and food to make going to the movies an entertainment experience. These new theaters still can motivate customers off their couch into their luxury chairs with better screens, 3-D and waiter service, in spite of many homes having expensive home theaters.
The conventional supermarkets must do the same and enhance the shopping experience for consumers – is it possible to make going to the supermarket as exciting as watching a movie in a theater? To start, these conventional stores must look at their product mix and focus on items that consumers need daily, not on what consumers buy only occasionally. For example, customers would benefit from a larger assortment of food options, say types of chips, than they would from a larger assortment of home cleaning supplies, say mops, which are only bought on occasion.
If consumer are not provided with more food choices, they will drive past the more conveniently located supermarkets in favor of shopping at a destination store with more unique product offerings and service. It doesn’t take a rocket scientist to sell food – it is a commodity we all need – but how it is sold will determine who wins the grocery war.
This is the major problem facing the conventional supermarkets. To combat it, they need to think unconventionally. I don’t think you can buy a mop at Whole Foods, but you can on Amazon. By buying Whole Foods, Amazon will be able to join the best of both worlds of online and brick-and-mortar shopping.
Nobody said wars make sense, but sometimes they are needed for the greater good. Hopefully Amazon’s purchase of Whole Foods and its entry in to the battlefield of the grocery war will ultimately benefit all of us. More and different stores will give us better stores. We will enjoy a better shopping experience – an experience that makes us want to go to the grocery store to see and taste the new and exciting food offerings.
