The predicated British invasion of 2007 â€” or the opening of Tesco stores on the West Coast last fall â€” proved less traumatic for traditional retailers than feared, with many industry observers saying the financial impact has so far been minimal. But the U.K. retailer’s psychological influence has been felt far beyond its initial markets and caused supermarket retailers to re-evaluate their store formats and product offerings.
Tesco opened its Fresh & Easy stores in California, Arizona and Nevada in November, following months of anticipation. The stores are loosely based on Tesco’s Express Metro format in the United Kingdom, with a strong emphasis on express shopping. Product offerings lean toward private label as well as natural and organic.
Initial reaction, according to retail industry experts, is that the openings had little effect on traditional supermarkets: “It’s doubtful that supermarkets and supercenters in Phoenix, Southern California and Las Vegas have seen a measurable loss in either transactions or sales due to the Fresh & Easy stores,” reported Barrington, Ill.-based retail consultant Willard Bishop in its January 2008 Competitive Edge newsletter.
But, says Managing Partner Jim Hertel, “There are really two impacts â€” the direct impact, that is to say, the sales they are developing and where they are garnering their share. I would say it’s been a real minimal impact on traditional retailers.
“The flip side is this whole notion of format experimentation, and especially small-format experimentation. We’re seeing an awful lot of people who are experimenting with smaller footprint stores.”
The U.S. grocery industry has been shrinking â€” at least in terms of its thinking â€” for some time, even prior to Tesco. Many industry experts report U.S. grocery retailers that have successfully retained shoppers have focused on unique, often smaller formats, convenience and differentiation through consumer data.
In 2007, grocery held 56.3 percent of the consumer packaged goods share of market, down slightly (0.2 percent), from 2006, reports Information Resources Inc., Chicago. Wal-Mart held 18 percent of the market, while other supercenters held 13.3 percent, mass merchandisers 9.2 percent, club stores 7.3 percent, drug stores 5.6 percent and dollar stores 1.2 percent.
“Grocery retailers’ differentiation strategies are moving the needle in their favor,” while supercenters are beginning to cannibalize existing stores, IRI stated in its Times & Trends report “Channel Migration 2007.” But it points out, the cross-channel battle for market share is not over. In fact, the biggest gainers last year were drug stores, which increased their share of CPG sales 0.5 percent.
When it comes to beverage sales, supermarkets still account for the majority, or 61 percent. “Other” retailers, including convenience and dollar stores, sell 13 percent of beverages, while supercenters sell 10 percent, club stores 8 percent, mass merchandisers 5 percent and drug stores 3 percent. Beverages sold through supermarkets declined 0.8 percent in 2007 vs. the prior year.
Some of the best-in-class retailers are examining smaller formats with more limited product selections as a better way to appeal to consumer needs, according to Cannondale Associates, Wilton, Conn. The company’s PoweRanking study allows product manufacturers to rate retailers and retailers to rate manufacturers on their business fundamentals. “The result is that ‘small is the new big,’” Cannondale said in its most recent study.
Many retailers are experimenting with urban platforms based on Tesco Metro and France’s Carrefour Dia stores, says Ken Harris, partner at Cannondale Associates. Examples include Chicago’s Dominick’s Urban Fresh Stores, Manhattan’s Whole Foods Market at Union Square, new Giant Eagle Express stores and Wal-Mart’s new Marketside pilot stores in Arizona.
In keeping with the “smaller-is-better” theme, small retail formats have made mid-sized or regional product manufacturers more important to retailers, the report says. Local manufacturers are more likely to find a receptive audience when they are pitching products to retailers because they can work more closely with the retailer and address local preferences.
“There is one wild card,” Harris says. “These ideas were built on a three- to five-year strategic plan. No one factored in oil costs at $120 per barrel.”
Higher oil costs could easily force consumers back into bulk purchasing situations as they try to conserve fuel by making fewer store trips.
But, Harris says, that could be a boon to the retailers that come up with the right format with the right product and price selection. “You could argue that it’s an enhancement. Trips are becoming even more important,” he says. “The number of trips has declined for the past seven years. That trip is even more important. [Retailers] better find a way to deliver.”
Harris’ comments are echoed in a recent ACNielsen report that shows consumers are combining shopping trips to compensate for higher gas prices. The number of grocery store trips has dropped from 72 per year in 2001 to 59 in 2007. Shopping trips to all outlets declined from 181 per year in 2001 to an average 164 last year. Grocery’s household penetration, however, dropped only one point during the measured period, indicating consumers are still shopping in those outlets, albeit less frequently.
“Long-term trends show us that all value retailers â€” supercenters, warehouse clubs and dollar stores â€” are gaining in their quest to grab shoppers,” said Senior Vice President Consumer & Shopper Insights, Nielsen Consumer Panel Services Todd Hale in a statement. “Keep in mind, however, that some U.S. grocers reported stronger same-store-sales growth than supercenters or dollar stores in 2007. Proximity to shoppers and a healthy focus on convenience and value helped many of these grocers deliver sold results.”
The company also noted that both deep-discount grocery retailers and high-end, specialty grocers significantly increased store counts between 2001 and 2007. “New and remodeled mainstream grocery formats also helped pave the winning ways for some grocers,” Hale said.