Survival of Retail’s Fittest Competition

Photo Courtesy of Blue Apron

The supermarket space has always been highly competitive, but the challenges retail outlets face today don’t come solely from competing supermarkets. They come from all over. Farmers markets and community-supported agriculture (CSAs) offer consumers fresh, locally sourced produce. Club stores offer bulk savings. Regional delivery services and online outlets offer convenience. Deep-discount chains offer little in terms of variety, but have low price appeal. While none of these competing outlets are a direct threat to retailers in and of themselves, it’s a death by a thousand cuts that has prompted many in the industry to rethink their business model.

Is Retail Dying?

Is traditional retail dying and what does traditional retail even mean in 2017? “What constitutes a conventional retailer?” asks Bruce Peterson, president of Peterson Insights Inc., based in Fayetteville, AR. “Does that mean Kroger? Does that mean Wal-Mart with 4,400 super centers with a full range of fruits and vegetables? Are they a conventional retailer? The whole definition of that comes under challenge.”

Peterson’s retail produce knowledge comes from his time serving as senior vice president of GMM-Perishables at Wal-Mart Stores Inc. and as president/chief executive at Naturipe Farms. He sees little threat from the majority of retail outlets, but it’s the discount retailer that is making inroads. “Every little bit hurts,” he says, “but it’s not going to be significant penetration.” Peterson suggests stores such as Aldi and Lidl will impact other retailers the most. “They don’t sell the breadth of the assortment of fruits and vegetables that the traditional retailers sell, but their pricing is great and they sell a lot of produce, and they’re continuing to expand stores.”

But does this signal the death of retail supermarkets? “It’s unlikely, depending on where you’re talking about,” says foodservice consultant, Maeve Webster, president of Menu Matters, Arlington, VT. “Urban consumers have an ever-growing number of options that are either seasonal or year-round, so in urban areas, supermarkets may need to make the most drastic changes to their offerings and operations in order to maintain their relevancy.”

Many retailers have already responded to these new challenges. “Throughout the past few years, fresh produce has received new attention from traditional retailers, as well as from other channels looking to increase basket size or draw additional trips,” says Andrew McGregor, vice president, produce, bulk and floral operations for Sprouts, based in Phoenix. McGregor believes Sprouts has been successful by appealing to a broad range of consumer needs and preferences. “For Sprouts, it is important to offer a wide assortment of organic produce while simultaneously delivering a compelling and affordable value proposition. Meeting these broad sets of needs has been critical to the success of Sprouts’ produce operation.”

There is good news for the industry as a whole, too. As options for purchasing fresh produce have increased, so has the amount Americans are consuming. “The consumption of fresh foods is definitely on the rebound,” says David Portalatin, vice president and food industry analyst at the market research group NPD, based in Port Washington, NY. “Consumption of fresh in the United States is still down compared to 20 years ago, but the numbers are definitely trending upward.”

Portalatin attributes this trend to Millennials. “On a per capita basis, consumers in their 30s and younger today are consuming fresh foods 97 times per year more than previous generations did,” he says. “That’s a 23 percent increase. As that consumer group exerts its dominance over the consumer landscape, we expect fresh food consumption to continue to grow.”

Adapting To Competition

The effect emerging competitors have on each other means adaptability will be key in survival going forward. “What we’re seeing is the morphing of online and brick-and-mortar shopping into a similar experience,” says Peterson. “Interestingly enough, Amazon is opening brick-and-mortar stores; and companies such as Wal-Mart, Kroger and H-E-B are offering the ability to go online and have it delivered to your house or picked up at a location.” Peterson has several solutions to meet these challenges. “First, one is how do people make decisions about what they’re going to get — do they go online and browse? Do they go in the store and browse? It’s the selection process that first has to be discussed. Then, where do they get the product? Do you go to the store? Do you have it delivered to your house? Do you have it assembled at a location and pick it up while you’re getting gas at that location? All things are being transformed at the same time.”

Alan Siger, chairman of Pittsburgh-based Siger Group LLC and former president and chief executive of Consumers Produce Company, offers consulting services to the produce industry. “You’ve got premium grocers like Whole Foods and Trader Joe’s, you’ve got discount grocers like Aldi and Lidl’s coming in, you’ve got club stores like Costco and Sam’s Club, you’ve got convenience stores selling more and more stuff and the big deal now is direct online delivery like AmazonFresh. All of a sudden, with less and less product going through the Kroger model, your customer base is going to shrink.”

Some of these outlets have closed distribution systems, so if they are out of a commodity during a busy shopping day, it doesn’t get replenished, whereas the small chain store or independent grocer would call their distributor to restock.

Siger suggests wholesalers get proactive with these companies and find out what they need, where their distribution centers are and how to get approved as a vendor — any way to be included. “Look at the traditional closed systems — a company like Target. Is there a way to get in there and talk to corporate where you could become a secondary distributor for them so when their warehouse delivery is not there, or if they’re short of something at the store they can get it in there rapidly? It’s a challenge but every challenge is an opportunity.”

Traditional supermarkets need to take a look at their entire model from the top down. Peterson says there are questions they need to ask themselves. “How do they deploy floor space? What is the assortment you want to carry in that floor space? Who is the customer you’re trying to attract to that location and how does that customer want these things delivered to them? What does the store represent to somebody — is it a physical building or is it a truck that pulls up and delivers something you ordered from that banner to your house? Clearly, the blending of virtual and brick-and-mortar shopping is going to continue to accelerate. There’s definitely going to be the recognition of how do we deal with the way the consumer wants to receive that product.”

Delivery Challenges

Regional delivery options from companies such as Peapod and FreshDirect aren’t new, but they are expanding. These companies, and others like them, shorten the supply chain by delivering straight to consumers — and fresh produce is a part of this equation. “Peapod’s customers skew higher in fresh, especially fresh produce and organic offerings,” says Anthony Stallone, vice president of merchandising, Peapod, headquartered in Skokie, IL. “Our own brand, Nature’s Promise, wallet-friendly organics does very well, and we continue to see a higher percentage of organic produce being purchased every year across all baskets.”

As a subsidiary of international food retail group Ahold Delhaize, Peapod is able to leverage the company’s global supply chain to offer freshness and variety — and even provides local produce in some markets. “Customers in select markets were given the opportunity to add a Local Farm Box to their regular Peapod shopping cart and have it delivered straight to their door. The selection of produce varied weekly by what was available locally and even came with suggested recipes and information on the farmers,” says Stallone. The success of the program, which began in 2013, has prompted Peapod to expand it to other markets.

Eric Stone, vice president fresh categories for FreshDirect, based in Long Island City, NY, isn’t worried about newcomers to the digital retail arena. “While there are competitors entering this space, unlike new entrants, at FreshDirect food is in our DNA. We are a food-tech company. Our focus has always been on fresh, with 50 percent of our basket from fresh categories.”

Though small, the convenience of online shopping also extends to produce. “Digital ecommerce is very, very small,” says NPD’s Portalatin, “and we’re not among the early adopters of that trend in the fresh food business, but it’s growing. There are more and more people who are very determined to get the fresh foods, including fresh produce, into the e-commerce channel; if you look at some of the disintermediation of transportation and delivery models, you start to see that becomes very realistic.”

Deep Discounters

Deep discount outlets like Dollar General are not places consumers typically think of as produce purveyors, but they too are beginning to provide certain offerings. “Generally, what you see in stores like that is relatively high turn and shelf stable, like potatoes,” says Peterson Insights’ Peterson. “You don’t see this broad assortment of fresh fruits and vegetables.” These general merchandise retailers, the discount ones in particular, aren’t trying to satisfy all the consumer’s produce needs; but if someone goes into a dollar store to buy batteries and buys bananas as well, they’re not buying them from their local grocery store on their next visit.

Farmers Markets and CSAS

According to Janie Maxwell, who serves as the executive director of the Illinois Farmers Market Association, Naperville, IL, the surge of farmers markets across the country hasn’t impacted the supermarket’s bottom line significantly, but their influence can be found throughout the produce department. “I think they looked at farmers markets and asked, ‘What is the draw?’ If you go to a grocery store now, it looks like they’re trying to mimic the farmers markets. They’re trying to go after local produce to enhance the portfolio of products they offer.”

This has been great for growers who now have more options to sell their produce, but the one-on-one experience is not easy to duplicate in a store setting. “I think there’s a potential opportunity for growers and producers to use a farmers market and their connection with their consumer in a place where they control their product and marketing display,” says Maxwell. Once that connection is made Maxwell says the consumer may well go to his/her local supermarket and look for other products grown by that farmer. This creates an opportunity for retailers to capitalize with signage that calls out the local sources of the commodities they sell.

Changing Demographics

Changing U.S. demographics also drive trends, not just by age, but by ethnicity as well. “Peapod is always listening to the customer and aims to provide complete meal solutions that best fit their lives,” says Sprouts’ McGregor. “For example, in produce we are seeing huge increases in ethnic and specialty produce, like Spanish root vegetables, that have increased double-digits every year for the last three years.”

For Maria Brous, director of media and community relations for Lakeland, FL-based Publix Super Markets, catering to the Hispanic community is nothing new. “We have been serving the Hispanic population for decades and recognize the importance of each cultural group,” says Brous. Publix has also recognized the evolved palates of today’s shoppers who appreciate variety and are much more open to trying new products. Publix also caters to convenience. “We have found that our customers, in general, are looking for more convenience items, including grab-and-go, and premade healthier options. We offer a wide selection of cut fruit, freshly made salads and grab-and-go offerings in our produce departments.”

Eating fresh, organic and as locally sourced as possible also falls in line with Millennials’ desire for clean labels. According to NPD’s Portalatin, 55 percent of consumers, ages 18 to 24, say clean eating is very important for quality of life. “That attitude is really emerging among the younger consumer set and driving a lot of their choices.”

While clean is important, so is convenience, says Portalatin. “Just because we may have this desire to return to eating fresh, simple and whole natural foods, we still appreciate and have a demand for convenience items. That’s where you see things like the meal kits, or retailers who are doing innovative things in packaging or at some point pre-prepping or preprocessing fruits and vegetable and other fresh foods, and making them easier to incorporate into a meal solution.”

Portalatin says growth will come for food manufacturers, retailers and foodservice operators who intervene at various points on the consumer’s shopping list with tools like mobile apps or services like ready-to-eat food delivered to the door.

Sprouts has solutions for time-strapped consumers, too. “Sprouts offers a comprehensive, value-added program featuring on-trend offerings in salad blends and kits, precut fruit and vegetables, healthy snacking options and more,” says McGregor. In 2016, the company overhauled its precut vegetable program, expanded offerings and optimized its packaging and placement. “One example of the revitalized set includes adding numerous snack and party trays at a variety of sizes and price points that provide a broad assortment for the variety of usage occasions that were previously under-represented.”

Produce’s Future

With all the changes that have come to retail in recent years, what will the landscape look like in the future? “Generally speaking, brick-and-mortar will become smaller,” says Peterson. “This idea of one-stop shopping is not as important as it was at one time.”

With so many options, consumers may decide to pick up bananas at a discount outlet, buy fresh strawberries from the farmers market and order fresh-cut online and have it delivered. “The whole idea of the mass market is being replaced by mass customization.” Peterson also says retailers are going to invest more in forward warehousing. “For example, Wal-Mart is going to be investing more in distribution centers in 2017 than in retail stores because how you short-cycle the replenishment process for customers is not easy to do. You have Amazon thinking that through and FreshDirect thinking that through. The emphasis on logistical support is going to be a big deal in 2017.”

Making it easier for consumers to meet their grocery needs through their mobile devices will also be critical. “As technology expands into every facet of life, it is also influencing consumers’ grocery shopping experience,” says McGregor. “At Sprouts we are using technology, such as our mobile app, to have direct, and often personalized, communication with our shoppers. The app offers information such as store locations and weekly specials, plus the ability to clip mobile coupons and redeem offers with just one scan of a smartphone.”

McGregor suggests that as digital communication evolves, consumers will be able to learn much more about commodities than “price and item” details. Information on seasonality, source, preparation and serving will also be available, which will lead to increased consumer engagement and brand loyalty. “Technology also allows Sprouts to provide new ways to reach both existing and new customers. Sprouts partners with Amazon Prime Now to offer more than 2,000 fresh, natural and organic groceries spanning produce, meat, seafood, dairy, frozen and other packaged items in four markets. This service will expand to additional markets in the future.”

Stone at FreshDirect sees education as a key to future success. “As we move into 2017, consumers will continue to seek information about where their produce comes from, asking more questions around who’s growing it and how it’s bred. FreshDirect is uniquely positioned to be transparent in our customer communications across every touchpoint. In 2017, we will focus on educating our customers on how their produce gets to them — from the root to the delivery route — giving them the confidence that they are getting the freshest produce from a trusted source.”

Restaurants & Retail: Who Influences Whom?

Many of the same trends of convenience, health, locally sourced and organic are found throughout both foodservice and retail. Does one influence the other more, or are both driven by consumer demand? And what does that mean for the produce industry?

“Given several macro trends — continued move toward healthier eating, influence of world cuisines with heavy produce influence, clean label and ingredient transparency, seasonal menuing, etc. — I believe produce has only begun to realize its influence on American menus,” says Maeve Webster, president of Menu Matters, based in Arlington, VT. The consultancy group focuses on helping manufacturers and operators identify, evaluate and leverage trends in the food industry.

In some areas, however, retail is following foodservice, especially in the digital world. According to David Portalatin, vice president and food industry analyst for market research group NPD based in Port Washington, NY, “When you look at the restaurant space, digital orders are up 45 percent over the past two years because you have things like GrubHub, DoorDash and Uber Eats. Now you have AmazonFresh and Amazon Now and other digital platforms that offer the opportunity to get fresh foods into the hands of consumers in a very, very short span of time. I think you’ll see, even though it’s relatively small, those kinds of things are going to grow rapidly.”

How much do restaurants cut into retail and has the availability of chef-prepared delivery impacted retail in any noticeable way? “At the moment, I’m not sure these prepared meals or meal kits have significantly hurt either the restaurant or retail industries, as these programs tend to have a somewhat high drop-off rate,” says Portalatin. “That said, they indicate consumer interest in alternative sources for prepared or partially prepared meal options for at-home consumption.” Portalatin believes that, while this may be a threat, retailers are better leveraged to deal with it than foodservice. “Given the retail sector’s move into foodservice-style offerings, that differentiation may be dwindling. I think the food industry will increasingly see new and unexpected options pop up as the traditional segments continue to blur or, in some cases, potentially even disappear.”

The biggest influence of all may be the adoption of foodservice offerings by supermarket retailers. “Retailers are remodeling their prepared food areas to look more like the open food markets that have become very popular in a number of urban areas around the country,” says Brian Darr, managing director for Chicago-based market research firm Datassential. Darr breaks down foodservice into three major segments: restaurants, retail hosts (supermarkets, convenience stores, and other retail outlets with foodservice offerings) and on-site (schools and hospital cafeterias, etc.). “When we look at foodservice growth the past five years and forward the next few, we see supermarkets and C-stores as segments with growing foodservice sales and solid growth opportunities going forward. Foodservice sales at supermarkets have been estimated to be growing in the 4 to 6 percent range annually the past few years. That’s a stronger growth rate than what we’ve been seeing at restaurants.”