On 11 October Safeway announced it was going to either sell or close its 79 Dominick's brand grocery stores in Chicago. After 80 years in Chicago, San Francisco based Safeway leadership felt it was simply time for Dominick's to call it quits.
The grocery industry is truly global, because everyone eats and almost nobody grows their own food. It moves like a giant crude oil carrier, much slower than technology, so identifying trends takes more patience than, say, monitoring annual smartphone cycles. Yet, there are clearly pronounced trends which make a huge difference in performance.
Good for those who recognize them. Bad for those who don't.
Safeway, like a lot of the dominant grocers from the 1970s-1990s, clearly missed the trends.
Coming out of WWII large grocers replaced independent neighborhood corner grocers by partnering with emerging consumer goods giants (Kraft, P&G, Coke, etc.) to bring customers an enormous range of products very efficiently. They offered a larger selection at lower prices. Even though margins were under 10% (think 2% often) volume helped these new grocery chains make good returns on their assets. Dillon's (originally of Hutchinson, Kansas and later purchased by Kroger) became a 1970s textbook, case study model of effective financial management for superior returns by Harvard Business School guru William Fruhan.
But times changed.
Looking at the trend toward low prices, Aldi from Germany came to the U.S. market with a strategy that defines the ultimate in low cost. Often there is only one brand of any product in the store, and that is likely to be the chain's private label. And often it is only available in one size. And customers must be ready to use a quarter to borrow the shopping cart (returned if you replace the cart.) And customers pay for their sacks. Stores are remarkably small and efficient, frequently with only 2 or 3 employees. And with execution so well done that the Aldi brand became #1 in "simple brands" according to a study by brand consultancy Seigal+Gale.
Of course, we also know that big discount chains like WalMart and Target started cherry picking the traditional grocer's enormous SKU (stock keeping units) list, limiting selection but offering lower prices due to lower cost.
Looking at the quality trend, Whole Foods and its brethren demonstrated that people would pay more for better perceived quality. Even though filling the aisles with organic
products and the ultimate in freshness led to higher prices, and someone nicknaming the chain
"whole paycheck," customers payed up to shop there, leading to superior
returns.
Connected to quality has been the trend, which began 30 years ago, to "artisanal" products. Shoppers pay more to buy what are considered limited edition products that are perceived as superior due to a range of "artisanal quality" features; from ingredients used to age of product (or "freshness,") location of manufacture ("local,") extent to which it is considered "organic," quantity of added ingredients for preservation or vitamin enhancement ("less is more,") ecological friendliness of packaging and even producer policies regarding corporate social and ecological responsibility.
But after decades of partnership, traditional grocers today remain dependant on large consumer goods companies to survive. Large CPGs supply a massive number of SKUs in a limited number of contracts, making life easy for grocery store buyers. Big CPGs pay grocers for shelf space, coupons to promote customer purchases, rebates, ads in local store circulars, discounts for local market promotions, sales volumes exceeding commitments and even planograms which instruct employees how to place products on shelves — all saving money for the traditional grocer. In some cases payments and rebates equalling more than total grocer profits.
Additionally, in some cases big CPG firms even deliver their products into the store and stock shelves at no charge to the grocer (called store-door-delivery as a substitute for grocer warehouse and distribution.) And the big CPG firms spend billions of dollars on product advertising to seemingly assure sales for the traditional grocer.
These practices emerged to support the bi-directionally beneficial historically which tied the traditional grocer to the large CPG companies. For decades they made money for both the CPG suppliers and their distributors. Customers were happy.
But the market shifted, and Safeway (including its employees, customers, suppliers and investors) is the loser.
The old retail adage "location, location, location" is no longer enough in grocery. Traditional grocery stores can be located next to good neighborhoods, and execute that old business model really well, and, unfortunately, not make any money. New trends gutted the old Safeway/Dominick's business model (and most of the other traditional grocers) even though that model was based on decades of successful history.
The trend to low price for customers with the least funds led them to shop at the new low-price leaders. And companies that followed this trend, like Aldi, WalMart and Target are the winners.
The trend to higher perceived quality and artisanal products led other customers to retailers offering a different range of products. In Chicago the winners include fast growing Whole Foods, but additionally the highly successful Marianno's division of Roundy's (out of Milwaukee.) And even some independents have become astutely profitable competitors. Such as Joe Caputo & Sons, with only 3 stores in suburban Chicago, which packs its parking lots daily by offering products appealing to these trendy shoppers.
And then there's the Trader Joe's brand. Instead of being all things to all people, Aldi created a new store chain designed to appeal to customers desiring upscale products, and named it Trader Joe's. It bares scance resemblance to an Aldi store. Because it is focused on the other trend toward artisinal and quality. And it too brings in more customers, at higher margin, than Dominick's.
When you miss a trend, it is very, very painful. Even if your model worked for 75 years, and is tightly linked to other giant corporations, new trends lead to market shifts making your old success formula obsolete.
Simultaneously, new trends create opportunities. Even in enormous industries with historically razor-thin margins – or even losses. Building on trends allows even small start-up companies to compete, and make good profits, in cutthroat industries – like groceries.
Trends really matter. Leaders who ignore the trends will have companies that suffer. Meanwhile, leaders who identify and build on trends become the new winners.
Adam Hartung 