Moves to Small Formats and Item-Count Rationalization

It might be a little early to predict what trends will be among those destined to drive change in the food distribution industry in 2008, but let's give it a try anyway.

One trend that has surfaced recently, and is quite likely to gather power next year, is the rapid development of the small-format store. Similarly, retailers with a stable of big-footprint stores are likely to move in the same direction, as best they can, by attenuating stockkeeping units to drive higher sales productivity out of each square foot.

Let's look at each of these trends in turn, starting with the move toward smaller retail spaces. The most obvious example is the much-touted advent of Tesco's Fresh & Easy format into markets in the Southwest. Should that format achieve even a modicum of success, as is likely, that's sure to alert competitors that something new is afoot. Indeed, in a move that may be intended to blunt Fresh & Easy's move northward, Safeway has reportedly acquired five sites in Northern California that could accommodate stores of about 20,000 square feet. The retailer declined to comment about the purpose or scope of its real estate activity, so it might be that Safeway has other purposes in mind, including denying expansion sites to Tesco. Yet, in September, Steve Burd, Safeway's top officer, said the chain was ready to open smaller-format stores, assuming the small-format experience of Tesco seemed to be working out. Beyond that, some have predicted that a flood of “express” formats of some sort is likely to wash over the land before too long.

Regardless of how the Tesco-Safeway dynamic works out, others have been moving toward smaller stores for some time, albeit at a much slower pace. Included on that roster are Delhaize's Bloom stores, Whole Foods (especially older models), Trader Joe's, Aldi and, in some instances, price-impact formats such as Food 4 Less and Save-A-Lot. Some intend to increase rollout rates. Indeed, Wal-Mart Stores intends to speed rollouts of its Neighborhood Market format. At about 40,000 square feet, the format isn't truly small, but in comparison to Wal-Mart's other formats, it is tiny. Wal-Mart estimates that by fiscal 2009, it will open that format at the rate of 25 per year, or more than twice the rate of fiscal 2007.

Each of these operators' small-format stores has a sharply focused appeal, such as high quality, fresh-prepared, low price or convenience. Some combine an attribute or two. As a result, shoppers of the future will be obliged to regularly patronize more formats to meet various shopping needs.

Now let's turn to the SKU rationalization occurring at some larger-format stores. As is mentioned in the first element of this week's “Strategic Planner” feature, some retailers, notably Ahold's stores in this country, are moving well beyond category management by strategically reducing as much as 30% of SKUs in certain categories (Page 16). The objective is to improve the sharpness of pricing, increase quality perception, trim clutter and reduce costs.

No doubt we'll pick this up next year. This page is on hiatus until the first issue of January. See you in the new year.