Who’s your future retail partner?

FoodProcessing.com

With traditional grocery retailing in question, does the future belong to big-box supercenters, dollar stores or drug retailers? Food manufacturers need to make choices about where it makes sense to play.

By Jack Neff, Business Editor

Wal-Mart Supercenters and dollar stores are the fastest-growing retail markets for food products, but several other formats also are fast emerging as players in the market once dominated by supermarkets. Target, drug stores, club stores, foodservice supply stores, the new Sears Grand mass-merchandise format, even home-improvement stores are muscling in on grocers’ turf.

Despite the growth in a host of other formats, supercenters remain the fastest-growing segment of U.S. food retailing, according to Columbus, Ohio-based Retail Forward. After them, the consulting firm expects dollar stores and other small-format value retailers to continue to grow nearly as fast, adding 8,000 stores.

"Lacking both history and [in some cases] size to justify investing resources, how do CPG [consumer packaged goods] manufacturers identify and cultivate ‘ground-floor’ channel opportunities that could be the next major retail force?" asks Jim Hertel of Willard Bishop Consulting, Barrington, Ill.

Growth is emerging or continuing in a variety of formats that get less attention. For example, club stores, thought to have peaked after rapid expansion in the early 1990s, have been a potent growth channel in the past year.

Join the club

Indeed, while same-store sales have stagnated overall for Wal-Mart Stores in recent months, a reinvigorated Sam’s Club has been a surprise growth engine. Same-store sales for the U.S. Wal-Mart Stores division was a fairly anemic 2.2 percent in July, but Sam’s Club same-store sales rose 7 percent. Wal-Mart’s club rival, Costco, is doing even better. Overall sales through the first nine months of its fiscal year, which ends Aug. 9, were up 14 percent to $33 billion, with same-store sales contributing 11 percent growth.

Beyond Costco, Sam’s and BJ’s Wholesale Club, some other club-like formats also are emerging, presenting new opportunities for food processors, says Sven Risom, senior consultant with Cannondale Associates in Wilton, Conn.

He points to Cincinnati-based Gordon’s Foodservice, a foodservice supplier that’s opening retail stores at several locations around the country offering foodservice packs for walk-ins from both restaurants and the general public. Unlike clubs, the Gordon’s locations don’t charge membership fees. But like clubs, they offer smaller players and foodservice suppliers the opportunity to expand their customer bases shoulder-to-shoulder with big national retail brands, Risom says. In the case of H.J. Heinz Co., a player in canned soup in Europe and U.S. foodservice but not in U.S. retail, consumers can try a competitor to Campbell at foodservice outlets.

The growing variety of outlets that are at least open to tinkering with food offerings leaves manufacturers needing to make choices about where it makes sense to play. One major food company recently considered entering Bed Bath and Beyond stores with some products before running the numbers and determining it couldn’t be done profitably, said Jon Kramer, president of J. Brown Agency, Stamford, Conn. J. Brown develops co-marketing promotions with retailers and is jointly owned by the ad agency Grey Global Group and grocery products broker Crossmark.

DOLLAR SHARE OF GROCERIES & CONSUMABLES
	2003	2008
Traditional grocery	56.3%	48.3%
Convenience stores	12.4%	12.0%
Non-traditional grocery	31.3%	39.7%
Source: Willard Bishop Consulting

"If you don’t have the established distribution or logistics resources to get in there, it becomes much more expensive," Kramer says. "The cost per unit sold sometimes just doesn’t make sense. Plus, these companies really have to keep their eye on the volume ball. They’ve got to be looking at driving the high volume with their biggest customers."

That said, however, dollar stores’ growth clearly has captured the attention of branded food manufacturers. And drug stores have become aggressive about moving in on the turf of convenience stores and supermarkets by expanding their food offerings.

"Drug is a very big growing opportunity that everyone is focusing in on because of the aging of America and the shopper profile," Kramer says. "When people are dropping in there, they might as well be buying something else. And if you lump all of these new distribution opportunities together, there’s a high degree of interest."

Even home improvement retailers have begun to show interest in food and beverage brands to drive incremental sales via special displays near checkout stands. PepsiCo's Pepsi and Frito-Lay brands have done promotions with home improvement retailers, including Home Depot.