Big-Box Giants Sock It To Local Supermarkets

Nashville, TN (written by Duane Marsteller/The Tennessean) -- A growing number of Americans are bypassing traditional supermarkets in favor of big-box retailers, discount grocers and natural/organic stores for their food purchases.

Grocery chains are fighting the erosion of market share by adopting some of their competitors' strategies, such as adding fuel sales and walk-in medical clinics.

"The grocery business is very competitive," said Melissa Eads, a Kroger spokeswoman. "We all keep each other on our toes."

It wasn't as competitive as recently as a decade ago. Traditional grocery chains such as Kroger and Publix supermarkets dominated the market in 2000, accounting for two-thirds of U.S. grocery sales, according to UBS Investment Research.

Last year, barely half of food sales were at grocery stores.

Grocery store operators are being simultaneously squeezed from the top and bottom -- like the narrowest point in an hourglass, said David Livingston, a grocery industry analyst and consultant in Waukesha, Wis.

On the top, shoppers with higher levels of discretionary income are favoring more-expensive natural/organic grocers such as Whole Foods, The Fresh Market and Trader Joe's.

Natural/organic food sales grew 8 percent in 2010 compared with less than 1 percent in the overall U.S. food market, according to the Nutrition Business Journal. That has fattened the bottom lines of grocers like Whole Foods Market Inc., which recently said sales gains at its Franklin and Green Hills locations and others open at least a year pushed second-quarter revenue up by 13.2 percent.

Livingston said at the same time, price-conscious shoppers are flocking to big-box retailers, such as Wal-Mart and Target, and discount grocers like Aldi and Dollar General Market, part of Goodlettsville-based Dollar General Corp.

Groceries now account for 55 percent of Wal-Mart's domestic sales, up from 47 percent five years earlier. It's a similar story for Target, which recently added fresh food and meat sections to its West Nashville store. Groceries were 19 percent of 2011 sales versus 13 percent in 2007, according to company filings.

A Dollar General spokeswoman declined to comment, citing the company's upcoming second-quarter earnings release. The company previously said consumables, primarily grocery items, accounted for 74 percent of first-quarter sales.

Traditional grocery stores can't easily compete at the higher end by offering fancier, costlier items without potentially alienating frugal shoppers, Livingston said. Nor do they have the buying power and lower labor costs the big-box stores and discounters command -- factors that help the giants hold the line on retail prices.

"It's a classic squeeze play" on traditional grocers, Livingston said. "They probably won't go by the wayside, but their market share definitely will continue to shrink."

Grocers branch out

Some national grocers have struggled in the evolving market. Super-valu Inc., which operates the Albertsons, Save-A-Lot and Jewel-Osco chains, fired its top executive and said it would explore selling the company after reporting a 45 percent drop in quarterly sales.

Grocery chains largely have responded to declining market share in their core business by branching into nongrocery markets.

Cincinnati-based Kroger has been adding gasoline stations to its stores for almost a decade. All of the stores contain a pharmacy, with 12 also having a walk-in medical clinic. Almost two dozen have bank branches inside.

Kroger also continues to expand its natural and organic food offerings, with plans to triple its private-label lineup of natural foods by the end of 2013.

Livingston said such diversification strategies carry risks. "A traditional supermarket can't be everything to everybody," he said.

Some shoppers do business with multiple stores, seeking a wider selection of merchandise.

While Harry Lang was at Target's West Nashville store to pick up a few grocery items, he said he still prefers to buy his food at a pair of traditional grocery stores: Kroger and Publix.

"Usually the selection is better," he said.