Nation’s Grocers Bagging Up Bigger Profits By Paring Down Products and Retail Spaces

Posted on 1.12.15 by Jean M. Smith in Market Insight

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Dynamite comes in small packages.

It’s an old maxim seeing fresh play as many of the nation’s hottest grocers pursue a “rightsizing” strategy, revamping their supply-chain designs in a bid to maximize profitability and efficiency. And, after decades of the big box model driving supermarket industry growth, it’s a trend that’s heating up demand for smaller commercial spaces previously relegated to family-run and specialty grocers.

Food for thought

From Trader Joe’s to WinCo, there’s a fundamentals-fueled move toward smaller-format grocery that’s driving a permanent shift in the bricks-and-mortar grocery model. CBRE attributes much of this change to grocers becoming “digitally mature” in a bid to meet the demands of electronically savvy customers and, in particular, millennials.

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It’s a perfect storm for smaller. Now that fulfillment giants like Amazon have stepped in to own the all-things-for-all-people segment, the smart money in grocery supply-chain design is embracing trends like right-sizing and supply-chain segmentation. The result? According to Progressive Grocer, it’s a group of grocers gaining ground by worrying less about total market share and more about achieving higher sales per square foot.

“It’s all about efficiency,” CBRE’s Stan Lotridge explains, “and from ALDI to Trader Joes, WinCo to Publix, real growth in the grocery space is being driven by the smart use of technology and, along with that, achievements in areas like inventory optimization.”

Grocery, by the byte

This equation starts with the seamless incorporation of technology into the retail-grocery experience: speedier check-out lines, coupons connected to digital devices and the like. “Smaller spaces go hand-in-hand with the digital piece,” says Karla Smith. “Today’s grocers are combining tighter inventories with more efficient spaces and state-of-the-industry technology, allowing them to get people in, out and happy in record time.”

And it’s a growing emphasis on sales per square feet – and away from total volume – that Fortune magazine states is prompting all retailers to explore focusing more on stocking the right merchandise (say, their top 1,500 SKUs) and less on trying to offer something for everyone. Even the Targets and Walmarts of the world are testing out this approach, with Target’s new 20,000-sq.-ft. store in Minneapolis, for example, and Walmart’s ongoing rebranding of its Express stores to Neighborhood Market outlets.

Fortune’s Dan Mitchell makes an emphatic case for the more-efficient, sales-per-square-feet driven grocer. In a March 14, 2014 report, he predicts the eminent of traditional, hidebound grocers, stating that “under assault from Walmart and Costco on one side, and Whole Foods and Trader Joe’s on the other, the traditional supermarket must transform or die.”

Aldi Gets a Smaller-Sized “A”

Global supermarket giant ALDI, the world’s eighth-largest retailer, offers a textbook case in this leaner, meaner path to grocery-industry growth. Publications from the New York Times to the Daily Mail hail ALDI speak-softly-and-carry-a-small-stick approach to success.

In a November 2014 report, the Daily Mail reported that ALDI is using the “dynamite comes in small packages” approach to take on the UK’s Top 4 grocery retailers, opening up stores in the 4,000- to 14,000-square-foot range and focusing on a tight-number of top-selling SKUs of its popular private-label-branded products.

One big driver of ALDI’s smaller-footprint growth, the Times reports, is that smaller retail spaces don’t trigger some of the emotional hot buttons that prompt many communities to oppose new big-box spaces. In a recent report, the Times states that ALDI “has faced little resistance, compared with the heated opposition often headed by unions and politicians that Wal-Marts have encountered in larger markets.” Why? According to the Times report, ”There’s no reason to oppose an ALDI — it’s a small format, and they usually get space from an existing landowner or landlord, a small guy who’s plugged into the community.”

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