Food Industry Penetrates New Markets Nontraditional Retailers Challenge the Industry

Doris J. Newton (202) 219-13868

Recentill growth in sales of non- prices to consumers, they are tak- retailing industry. In early 1993, traditional outlets— ing business away from some there were 779, with an estimated embership warehouse nearby . Competition combined annual sales of $34.2 bil- clubs, mass merchandisers, and between traditional and nontradi- lion in 1992. Mass merchandisers, deep-discount drugstores—has tional food operators, aided further such as and Wal-Mart, and as caused traditional grocery food by the recent recession, continues deep-discount drugstores, such stores to modify marketing strate- to increase as the nontraditionals Phar-Mor, Drug Emporium,and gies and appeal to the more price- expand into other traditional gro- F&M,also sell increasing amounts bever- conscious consumer. cery departments, such as fresh of groceries, such as snacks, While nontraditional outlets do produce and fresh meat. ages, and canned and other pack- aged food products. Additionally, not generally offer the broad array In 1980, there were only eight the new Kmart and Wal-Mart su- of produce, bakery products,fresh wholesale clubs in the entire food meats and dairy products, and fro- zen foods found in traditional food- stores, they do market large amounts of specific categories of products—such as dry groceries, health and beauty products, and general merchandise. According to a recent Food Mar- keting Institute (FMI)report on al- ternative store formats, grocery sales of nontraditional retail outlets rose to $33.3 billion, or 6.2 percent of all grocery sales in 1991. The growth has primarily occurred within the last 5 years, but a rapid increase is expected through the end of the decade. Because these outlets are more specialized, have lower operating costs, and subsequently offer lower

to The author is an agricultural economist with the Although sfill the central force in today's grocery market, supermarkets have had Commodity Economics Division, Economic Re- adjust to keen competition in food retailing. Their services, bulk food sales, and "ware- search Service, USDA. house" pricing have helped.

FoodReview

AL- Food Industry Penetrates New Markets

Figure 1 Supermarkets Accounted for Over 70 Percent of Foodstore Sales in 1992

Specialized foodstores $23 billion Grocery stores $361 billion • Meat and fish markets $6 billion • Retail bakeries $8 billion • Supermarkets $273 billion • Produce stores $3 billion • Convenience stores $48 billion • Dairy stores $1 billion • Superettes $40 billion • Candy and nut stores $2 billion • Miscellaneous foodstores $5 billion

Total 1992 foodstore sales $384 billion

Source: Food Marketing Review, 1992 forthcoming by USDA's Economic Research Service.

percenters include full-line grocery 50 percent or more of supermarket guished by size, percentage of food stores, making competition in food sales come from food. Supermar- versus nonfood items offered, and retailing keener than ever. kets accounted for over 70 percent variety of services. of total foodstore sales and 76 per- The conventional supermarket cent of sales in 1992. Traditional was once the most common for- Supermarkets Still Supermarket formats include mat. In 1980,85 percent of all su- Dominate conventional supermarkets, super- permarkets fit the conventional stores, combination food/drug format, accounting for 73.1 percent The traditional food retailing in- stores, limited assortment stores, of grocery store sales (table 1). By dustry comprises a range of food- warehouse stores, and hypermar- 1991, only 49 percent of supermar- stores. These retailers include kets (see box). Each format is distin- kets were conventional, accounting broad-line grocery stores—super- markets, convenience stores, and superettes—and specialty food- stores, such as meat and seafood Table 1 markets, produce stands, delicates- Conventional Supermarkets Share of Sales Has Declined sens, and bakeries. Total foodstore sales for 1992 were $384 billion. Share of supermarket Grocery store sales at $361 billion Supermarket Share of supermarkets sales format accounted for 94 percent of this to- 1 1980 1991 1980 1991 tal, while specialty foodstores had Percent a 6-percent share (fig. 1). Conventional 85.0 49.5 73.1 30.4 The supermarket, the central Superstore 8.9 24.9 17.7 33.9 Combination food and drug .9 force in today's grocery market, is 8.9 4.0 17.1 Warehouse/limited assortment 4.7 14.6 4.2 13.1 primarily a self-service grocery Superwarehouse .5 2.0 1.0 5.1 store with a full range of depart- NA .1 NA .3 ments and annual sales of at least Note: Data may not sum to 100 due to rounding. NA= Not applicable. $3.3 million in 1992. Additionally, Source: Food Marketing Review, 1992, forthcoming by USDA's Economic Research Service.

January - April 1993 Food Industry Penetrates New Markets

shares and numbers over the last decade. Between 1980 and 1991, su- Coming to 'Terms' with Traditional perstores, combination food/drug Supermarket Formats stores, superwarehouses,and ware- house/limited assortment stores Combination food and • Most popular sizes stocked captured 42.3 percent of total su- drug store • Less than 10,000 square feet permarket sales (table 1). The num- • More product variety than • Little or no raw, perishable ber of these formats in operation in conventional supermar- products more than doubled during this kets same period. For example,super- num- • Nonfood items capture 25- Superette stores more than doubled in bers, accounting for 24.9 percent of 35 percent of sales • Annual sales below $3.3 and 33.9 • Nonprescription drugs and million in 1992 all supermarkets in 1991 percent of grocery sales. general merchandise • Wide variety of food/non- • Prescription drugs food • Size typically ranges from • Primarily self-service Societal Changes Spur 35,000 to 45,000 square feet Retailing Changes Superstore Changes in the work force, life- Conventional • Larger deli, bakery, and factors have • Highest percent of food specialty product depart- styles, and economic versus nonfood items ments contributed to slow market growth for the traditional food retailing in- • Size typically ranges from • Some self-serve bulk foods dustry and to the increase in larger, 3,000 to 30,000 square feet • Average size 35,000 square more diversified stores over the • All major store depart- feet last two decades. The increase in ments represented • General merchandise multiple-career households meant Hypermarket more disposable income,coupled Warehouse store with the demand for more conven- • 100,000 square feet or more • Strong price appeal ience, quality, and time savings. in size • Size ranges from 12,000 to • Up to 40 percent of sales in 35,000 square feet(super Retailers seeking new opportuni- general merchandise items warehouse stores range ties for greater sales to price- con- • Patterned after the Euro- from 50,000 to 140,000 scious consumers as well as pean hypermarket concept square feet) service-oriented consumers re- • Primarily food and some sponded with new supermarket Limited assortment store health and beauty aids, but formats and services to challenge • Limited number of product low emphasis on general the conventional supermarkets. brands merchandise Many supermarkets pursued the "one-stop shopping" concept by providing expanded service de- partments(meat, fish, and deli), and expanded nonfood depart- ments and services, such as phar- macies, video rentals, nonprescrip- for 30.4 percent of supermarket the store. Store sizes typically tion/prescription drugs, and gen- sales. range from 3,000 to 30,000 square eral merchandise, such as clothing. 9,000 to 11,000 A conventional supermarket is feet and carry from Competition was also sharp- selection of nonfood basically self-service, and foods items. The ened by the recent recession and conventional stores is and beverages dominate the stock. products in slow-paced recovery. Per capita It sells meat, produce, bakery, and limited. disposable income, adjusted for in- other food and grocery related The other supermarket formats flation, rose 1.1 percent in 1992 products as well as nonfood items are larger or offer more variety, from a previous drop of 1.3 percent such as soaps, detergents, and pa- specialty foods, prescription and in 1991. The 1992 food price in- per products. Items are generally nonprescription drugs, or other fea- crease was the lowest since that in prepackaged or individually tures or services(see box). These 1967. packed and displayed throughout other formats gained in sales

FoodReview 4 Food Industry Penetrates New Markets

Nontraditional Retail stores were More than 21 million people Outlets Move Into fully computerized, no-frills opera- have memberships in U.S. ware- tions offering a limited selection of house clubs. Club sales totaled Territory first quality, name- brand merchan- $34.2 billion in 1992. According to Added to these economic pres- dise. Grocery products were FMI,sales growth of warehouse sures was the growth of lower cost, mainly dry groceries and paper clubs has averaged 31 percent over price-oriented nontraditional out- products. Today, club stores have the last 5 years. Four firms ac- lets. Generally known to stock a expanded their offerings to include counted for over 90 percent of total high percentage of general mer- some services and perishable foods. sales (table 2). chandise, these outlets have ex- Warehouse clubs stock fewer Target areas for growth are panded their offering of groceries items than do traditional supermar- those with populations of 400,000 and related products. kets, but they concentrate on high- or more. These formats have grown rap- value, branded items displayed on idly and,for the most part, profit- pallets and packaged in large, mul- Deep-Discount Drugstores ably, over the last several years. tipack sizes. They also offer fewer Deep-discount drugstores are Besides other benefits offered to services than do supermarkets: known for their low-price image. consumers, they are noted most for there is no bagging, and operation They offer a broad selection of offering low prices. hours are shorter. products—mainly health and Warehouse clubs also incur beauty care products and general Membership Warehouse Clubs lower expenses for advertising, ad- merchandise, such as small house- Considered one of the fastest ministration, and shipping, result- hold appliances; some food items, growing segments of retailing, ac- ing in lower overall operating such as candy and other snacks; cording to Progressive Grocer maga- expenses compared with those of and a limited assortment of popu- zine, the first membership supermarkets. The clubs pass on lar, shelf-stable, high-volume warehouse club store opened in these savings to shoppers through foods. Located mainly along the San Diego, , in 1976. The lower prices. An FMI study con- east coast and in the Midwest in Price Company opened Price Club, cluded that prices in club stores for high-traffic shopping centers, these designed to appeal to a select grocery-related items averaged 26 stores vary in business style. Store group of individuals and small percent lower than in traditional sizes range from 25,000 to 65,000 businesses looking to save money. grocery stores. square feet. They generally stock a

Table 2 Membership Wholesale Clubs Have Become a Growing Retail Force

Share Units of sales r1992 1993 1994* Million Percent Number dollars Sam's Wholesale Club 12,339 36.1 208 256 305 The Price Club 7,480 21.9 88 94 102 Wholesale Club 6,620 19.4 91 100 110 Pace Membership Warehouse Club 4,358 12.8 87 115 137 BJ's Wholesale Club 1,760 5.2 29 39 54 Smart & Final 752* 2.2 116 125 139 Mega Warehouse Foods 293 .9 14 22 31 Warehouse Club, Inc. 241 .7 10 10 10 Wholesale Depot 200* .6 4 8 15 Club Aurreral 60* .2 2 3 8 4Q * Price Club of Mexico .1 0 1 3 H-E-B Bodega 10* ** 2 2 1 Source Club 1 * ** 0 3 7 * ** 4 0 1 1 Total 34,167 100 651 779 923

Note: Percentages may not total 100 due to rounding. *Estimate. **Less than 0.1 percent. 1 A joint venture between Wal-Mart and Mexico's CIFRA, N.A. Source: Food Institute Report, March 8, 1993.

January - April 1993 5 Food Industry Penetrates New Markets

Table 3 Table 4 Warehouse Clubs Show Low Operating Expenses and High Returns Wal-Mart Led the Way in Sales by Mass Merchandisers Membership Deep Traditiona warehouse discount Company Financial returns] rocery stores clubs drugstores2 Million dollars Percent Wal-Mart] 31,667 Return on Kmart2 24,749 invested capital 21.2 39.0 22.6 Target 9,041 Ames 2,819 Earnings before Caldor 1,868 interest and taxes 3.5 3.5 4.0 ' sales only. 2U.S. stores only. Gross margin 25.3 11.03 20.0 Source: "Warehouse Clubs Lead Discount Industry Growth,' Food Institute Report, Operating expense 21.8 7.5 16.0 July 25, 1992.

Ratio of working capital to sales 1.7 -.7 13.2 Ratio of invested capital Traditional 9.0 17.7 to sales 16.5 Supermarkets Respond Ratio of fixed assets Traditional supermarkets are re- 14.8 9.7 4.5 to sales sponding in several ways to con- 1 1991, estimated. 2Figures represent leading discounters. 3Includes 2-percent revenue from sumers who look to warehouse membership fees. Source: Food Marketing Institute, 1992. clubs and other nontraditional re- tail outlets for lower prices. , a privately held combina- tion food/drug store chain based day low prices," and are in- variety of brands in limited sizes "every in Grand Rapids, , has cre- variety of and negotiate with manufacturers creasing the number and ated a membership warehouse divi- for grocery products offered. to obtain low costs or bargain sion called SourceClub. It opened close-out items to keep costs low. Wal-Mart and Kmart are the in 1992, and marked the first time a. Like warehouse clubs, deep-dis- largest mass merchandisers. Wal- grocery chain has entered the ware- count drugstores have lower labor Mart's 1992 sales reached $43.9 bil- house club market. Big V super- and fixtures' costs than do super- lion, up 38 percent from 1991. market of Florida, , also markets. Gross margins (retailer Kmart followed, with $253 billion opened Price Rite as its new club markup over cost as a percentage in sales (table 4). Wal-Mart and division in 1992. operate supercenters— of total sales) are higher than those Kmart now Other supermarkets have ex- merchandise stores averaging for membership warehouse clubs, panded their product lines to in- 160,000 square feet with full-line su- but less than those of grocery clude multipacks and bulk items. permarkets. Wal-Mart operates 60 stores (table 3). Giant Foods of Landover, Mary- supercenters across the Southeast- The three largest deep-discount land, has a "Super Deal" section Southcentral States(Arkan- drugstore firms are Phar-Mor, ern and featuring bulk and multipacked, , Oklahoma, Mississippi, Drug Emporium, and F&M. sas, brand- name and private-label Kentucky, Tennessee, Alabama, products at prices comparable with ). Kmart operates four Mass Merchants and (and sometimes lower than) mem- supercenters in , North Caro- bership club prices. An Albertson's Mass merchandise stores offer lina, and Mississippi. an array of general brand-name store operator in Bellevue, Wash- merchandise and some private (or Some of the top mass merchan- ington, uses a similar approach to store) label goods, grocery related disers generate as much as 25 to 30 compete with a nearby Costco products, and snacks and dry gro- percent of their sales from grocery- warehouse club competitor by of- ceries. New stores often exceed related products. They carry so- fering economy-packed boxes of 100,000 square feet and stock be- called "impulse" food items, such fresh produce. One small Lucky tween 70,000 and 80,000 products. as snack foods and other shelf-sta- Stores operator in West Los Ange- They are largely located in small ble foods, which require little labor les, California, promotes "Key towns and large suburbs. Mass and sell quickly. Buy" specials which offer lower merchandise stores emphasize discount prices than its area com-

FoodReview 6 Food Industry Penetrates New Markets petitors for specific national In the case of deep-discount brands. Another larger, more mod- drugstores, some industry watch- em Lucky store in the same city in- "One thing is certain: ers speculate that growth may cludes a "Max Pak" section with nontraditional retail slow in the future. Drug Empo- bulk items displayed on pallets. outlets are having a rium opened 39 stores between Promotional advertising for this 1990 and 1991,compared with only section suggests "saving the con- significant impact on 6 new stores as of August 1992. It venient way." the traditional also posted a $4.7-million loss for Supermarkets are promoting supermarket the fiscal year ending February 1992. Phar-Mor filed Chapter 11 their advantages over warehouse industry— clubs as a way to respond to com- bankruptcy in August under allega- petition. Longer hours of opera- and the industry is tions of mismanagement and tion, convenient locations, no listening." closed 55 stores by the end of 1992, membership fees, and more variety with plans to close another 31 this are some of the advantages offered. year. Chester's Market, an independent Despite the current problems of operator in East Windsor, Connecti- some of the larger deep discoun- cut, promotes its reputation for pro- ters, the prospects of market satura- viding "friendly, knowledgeable tion, and other factors of compe- service" to its customers, according labor-intensive services are added, tition, the future of the nontradi- to Progressive Grocer magazine. costs and gross margins will in- tional retail outlet is bright. One Chester's emphasizes its catering, crease. At that point, clubs will thing is certain—nontraditional re- birthday cakes made to order, spe- have to find new ways to keep cost tail outlets are having a significant cial store coupons, and courteous advantages in these departments. impact on the traditional supermar- telephone service. ket industry, and the industry Increased competition among is lis- tening. warehouse clubs in the same mar- Competition To Stiffen ket could result in new marketing Many food retailers are seeking strategies to attract new customers. References Future growth will be concentrated to lower costs in order to compete Alternative Store Formats: Compet- in small markets where there is with the nontraditional formats. Su- less ing in the Nineties, Washington, DC: competition. More permarket retailers may ultimately clubs are ex- Food Marketing Institute, 1992. be forced to lower margins and pected to expand operations out- "Close-up: Clubs," Progressive prices in a number of categories, in- side the United States. For Grocer, May 1992. cluding personal care products, example,Price Club and Costco al- nonprescription drugs, paper prod- ready have Canadian units, and Food Institute Report, Fair Lawn, ucts, and laundry and household Wal-Mart and Price Club have NJ: American Institute of Food Dis- supplies. joint ventures with Mexican firms tribution, Inc., selected issues. and plans for operations in other Food Marketing Review, 1991, Nontraditional retail outlets will countries. Industry sources fore- AER-657. U.S. Dept. Agr., Econ. continue moving into supermar- cast growth in warehouse clubs to Res. Serv., March 1992. kets' territory with more new 950 stores by the year 2001. stores and more food items. For ex- Price, Charlene C., and Doris J. Among mass merchandisers, ample, many warehouse clubs Newton. U.S. Supermarkets: Charac- Wal-Mart plans to open 30 new su- have added fresh bakery, meat, teristics and Services, AIB-502. U.S. percenters in 1993. Kmart also poultry, fish, and produce, as well Dept. Agr., Econ. Res. Serv., Nov. plans to open 15 similar stores this as more nonfood services like film 1986. developing, car-buying programs, year, called Super Kmart Centers, Supermarket News. Capital Cities optical departments, and travel with plans for another 70-80 super- Media,Inc., selected issues, Jan.- services. However, as these more centers to open in 1994. Kmart also is expanding the grocery depart- Aug. 1992.• ment in all of its 2,300 stores and will offer a mix of branded and pri- vate-label nonperishable products. This is part of a $2.5-billion chain- wide refurbishing program planned for completion by 1995.

January - April 1993