Food Retailing 2020

Reporting by MARK HAMSTRA and ELLIOT ZWIEBACH

Ten years ago, in the year 2000, the food-retailing industry was in a state of upheaval.

A wave of consolidation had created supermarket giants with a scale built to rival Wal-Mart, the once-hot Internet-grocery segment appeared ready to flame out, and home-meal replacement was all the rage.

Ten years later, the landscape has changed significantly — the consolidation race has slowed to a relative crawl, the online model has shifted, and home-meal replacement has evolved from a small section of the deli to a thought process that reverberates throughout the whole store.

But what will the next 10 years bring? On the following pages, SN presents some thoughts from various industry participants and observers about where the food-retailing industry is headed by the end of the next decade in the year 2020.

“We've been talking about 2009 really being the start of the next century,” said John Rand, director of retail insights at Cambridge, Mass.-based Management Ventures Inc., which is part of Kantar Retail. “The first eight or nine years of this century were really just playing out old trends.

“We've got a different shopper now. Coming out of the recession, we are starting to move our attention away from the Baby Boomers and toward the younger generation.”

Marketing to these people will require new tools. Data will be a prized commodity, and retailers and suppliers will need to work together in new ways to satisfy consumers who want answers at the touch of button.

Store formats will evolve to meet the opportunities and restrictions of the shifting consumer landscape, and fragmentation will smash the cookie-cutter mold of the traditional supermarket.

In-Store Digital Marketing

Rand of MVI said the concept of marketing to the younger generations — those following the aging Baby Boomers — presents the single greatest challenge to the industry during the next decade.

“Marketing to people who grew up in a digital age is fundamentally different, and if we don't grapple with that between now and 2020, we won't have an industry in 2020,” he said. “I think we are poorly positioned in that way as an industry, but very well-positioned in terms of some individual companies.”

One of the places such marketing will show up, he noted, is in-store digital marketing.

“It is one of the most important things the supplier and retailer can cooperate in learning how to do right now,” he said. “The younger generation, with their ability to search the Web and comparison shop — with that mindset, I have a mental image of someone poking the shelf tag, as if to say, ‘Next page, please.’”

He said he expects that in-store shopping devices — such as the handheld scanners in test at a few chains — will “just go away” and instead be replaced by an application that works on smart phones.

“However we work it, communicating with the shopper in the aisle, at the point of purchase, in a way that is much more personal and holistic, is probably one of the bigger trends that we ought to grapple with in the next decade,” he said.

This converges with other trends, he explained — including the increasing demand for information on packaging about nutrition and dietary concerns that manufacturers are unable to accommodate.

He expects shoppers eventually will simply point their phones at a bar code to access a wealth of information — about allergens, calories and other dietary concerns.

In addition, he said, comparing prices at various retailers while shopping in a store, and gaining access to product recommendations and reviews from peers, will become much more commonplace.

“We are already seeing any number of services that offer real-time price comparisons that address that, and sooner or later we are going to have to grapple with it,” he said. “The retailers that get on board will have an easier time in the marketplace. Retailers that can make that information available will have a competitive advantage.

“That melding of digital plus bricks and mortar is something we all knew would happen sooner or later,” he said. “We have to say, ‘OK, the digital world is not different from the shopping world, and we have to break down that barrier.’”

Niche Formats

Neil Stern, senior partner at McMillan Doolittle, Chicago, said he expects to see a continued fragmentation of food shopping over the next 10 years.

“We've already seen a lot of fragmentation over the last 10 years, with supercenters, clubs and dollar stores, and that trend will continue, with even more fragmentation coming in at least three ways.

“First, there will be more ethnic fragmentation, and the demographics of the U.S. will feed into this trend. We're in the middle now of laying the groundwork for expanded ethnic-themed markets, whether Hispanic or Asian, but right now no one has anything beyond a small footprint.”

Over the next decade, however, Stern said he expects the industry will see the emergence of chains pursuing ethnic markets “on a full scale.”

In addition, he said he expects growth in discount retailing, including hard discounters like Aldi and Save-A-Lot.

“We will see a lot of morphing around the edges of what a discount chain is, and new players, like Germany's Lidl, will find their way into the U.S. market,” he predicted.

He also expects a small-format, convenience-oriented supermarket format to emerge.

“No one has quite figured out yet how to operate these, but there are examples with Tesco's Fresh & Easy, Giant Eagle Express, Safeway's The Market and, one that didn't work, Jewel's Urban Fresh. But this type of store will gain a lot of attention,” he said.

“The shopper's mission is fragmenting. We used to have the notion of a housewife doing her weekly grocery shopping in a store organized to meet all her needs. For years, stores were separated by specialty departments, but going forward, they will be designed to accommodate different shopping missions.”

Stern said he also anticipates increasing global influence on food retailing in the U.S.

“With companies like Delhaize, Ahold and Tesco already operating in the U.S. market, you can anticipate the No. 2 supermarket chain in the world, Carrefour, will come back to the U.S., along with No. 3 Metro Group from Germany, which operates cash-and-carry stores. And Lidl, the eighth-largest chain in the world, is also likely to come, and that could change the marketplace by 2020,” he predicted.

Jim Hertel, managing partner at Willard Bishop, Barrington, Ill., agreed that changes in the industry during the next decade will drive increasing diversity among consumers, “with the rich getting richer, the middle class declining, and the country becoming more ethnic.”

“If one size didn't fit all before, it really won't in 2020,” he said.

Assortments will be tailored by store and shopper, Hertel predicted.

“Store clusters are out, and store-by-store is in,” he said. “Cross-banners and assortments will look much different from one store to another as they better reflect chains' strategies to win with shoppers.”

Value Retailing

Hertel also predicted that small-format value retailing will be a big winner by the end of the decade.

“Supermarkets will get small formats right,” he said. “Most won't be like Fresh & Easy but more like Aldi, Save-A-Lot and PriceRite, with a strong value emphasis, strong store-brand orientation and a neighborhood focus, catering to Hispanics, African Americans and other ethnic groups, especially in perishables.”

Supermarkets will look for sites to fill in areas wherever they can, including many sites that are likely to come from retail outlets which closed during the recent recession.

Hertel also predicts store brands will reach 35% of dollar sales and 45% to 50% of unit sales — double the unit sales of today — “and retailers will become leaders in innovation rather than fast followers,” he added.

Rand of MVI said a trend that has already begun to play out, and will continue over the next 10 years, is the concept of what he calls “the post-modern market.”

The era of unlimited space to build new stores is drawing to a close in the U.S., and retailers will continue to pull away from store proliferation in favor of driving more productivity from existing boxes.

“When you start to approach saturation as a retailer, you go back and say, ‘What did I miss? What else can I do to attract more people to my business?’

“One of the things you can do is format variation — you can go back and fill in with smaller stores, which also allow you to have targeted stores, can have ethnic variations, and varieties that are specified to a micro-type market.”

He predicted “a huge battle” between those companies that are used to operating small-format stores — such convenience stores, drug stores and dollar stores — and those that are not but are seeking to get into that niche.

“There will be a battle over small formats of choice,” he said.

The pressure to get more productivity out of existing boxes will also add pressure to the supplier-retailer dynamic, Rand said.

“We are starting to see that happening with SKU optimization and reduction, and we've seen it for years with transfer of costs to vendor partners, and we see it with format experimentation,” he said. “Retailers want to make more money from new formats, and from assets they already own.

David S. Rogers, principal at DSR Marketing Systems, Deerfield, Ill., agreed that food shopping will be influenced not only by the growth of the Asian and Hispanic populations and by the aging of the Anglo population, “but also by the future course of gas prices and economic recovery from the ‘Great Recession.’”

“My best guess is that the economic recovery will be tepid because of the deficits and the continuing housing problems, and that price and value will remain the dominant drivers affecting shopping behavior,” he said. “This scenario favors private brands, dollar and limited-assortment stores, which could morph together, as well as supercenters and price-focused supermarkets.”

He said he expects the trend toward smaller store size will continue for several reasons, including excessive competitive floor space, development costs and the aging of the population.

Gary Giblen, executive vice president, Quint-Miller & Co., New York, also agreed that pricing will become increasingly important by 2020.

“After 20 years or so of glitz and the yuppie factor, pricing will be more pertinent over the next decade, and even if the economy improves, people will remain more aware of saving money and avoiding conspicuous consumption,” he said.

At the same time, consumers will also be looking for “price-value relationships,” he said. “They won't be interested in cheap food, but in getting good value for the dollar — that's what people will respond to.”

He predicted that both low-priced, low-quality operators and high-priced, quality operators will be less successful than those offering “some form of EDLP who will be able to show that price-value relationship better than high-low operators.”

Private label will continue to grow, he said, but at a more gradual pace.

Consolidation Revived

Giblen also expects further consolidation in the industry.

“There's no limit to consolidation, particularly if more European operators get involved in the U.S. supermarket industry,” he said. “A lot of deals today in the consumer space are driven by exchange rates, and with the dollar at an all-time low, and with most continental food retailers and the British companies doing better than the U.S. companies are, they will have more ability to move.

“So just as a large number of national drug store chains has shrunk to two or three, the same could happen to supermarkets, with some European companies acquiring U.S. brands and some U.S. companies buying European companies.”

Burt P. Flickinger III, managing director of Strategic Resource Group, New York, said he expects the major national U.S. chains will continue to shed stores, and that smaller, regional chains and independents will represent much of the growth in the industry in the next 10 years.

“You'll see record growth in price-impact and hard-discount formats, and family-owned and -operated chains,” he said.

He cited Boise, Idaho-based WinCo, a discounter that has been growing rapidly in the Western U.S., as an example of the type of company that will lead growth over the course of the decade.

“I think Grocery Outlet, Aldi, Save-A-Lot and Trader Joe's also will have record sales growth, and we will also see tremendous growth from big, high-volume, family-owned and -operated bigger-box retailers,” he said.

He cited Cincinnati-based Kroger Co. as one of the publicly owned companies that will have the most success during the next 10 years, but he also predicted that Minneapolis-based Supervalu “will have its core businesses bounce back” by 2020.

Independents like IGA operators and co-op members will also see a growth surge, he said, citing the opportunities presented in real estate that will be vacated as big chains pull back.

This concept of refurbishing used retail space for supermarket use will also become increasingly important in site development over the next decade, predicted Tim Morrison, a partner at Little Diversified Architectural Consulting, Charlotte.

With all the retail space that has been abandoned during the last few years, supermarkets will increasingly be adapting their stores to fill existing spaces.

“We have seen a trend toward a more complicated takeover and remodel,” he said. “That's a particular challenge for people who haven't done lot of it, to audit a dark store somewhere, and place in a new format, but we see a lot more of that going on. It would appear it is going to take years for a lot of these boxes to be taken over and refit.”

The retail landscape increasingly calls for more subdividing of available spaces, he said, such as when small-format stores seek to occupy spaces that previously were used for larger formats.

“But the real estate is out there, and it's abundant and cheap, and for those that have money, this may be a good option,” he said. “Who knows what the real estate market will be like in 2020? But it seems like there's an abundance of real estate out there now.”

He agreed that major chains will continue to look for “translatable brands” that will target demographic niches, such as Publix Super Market's Sabor concept and Food Lion's Bottom Dollar banner.

“We will continue to see demographically based design,” he said.

Enhancing Efficiencies

Supermarkets also will continue to enhance the energy efficiency of their stores with better technology for lighting and refrigeration.

“Power consumption will continue to be reduced, because it is getting more and more expensive, and the technology is there to make our buildings more and more efficient,” said Lonnie Peterson, chairman of Cuhaci & Peterson Architects, Lakewood, Fla.

As consumers — especially younger generations — place increasing emphasis on sustainability, retailers also will need to address this issue, he said.

“When somebody spends $100 or $200 a week in a store, they want to do it a way that goes with their personal lifestyle,” he said. “If there's a grocery store that's sustainable in its operations, people will spend more of their money there than in a store that is not sustainable.”

In that vein, he also expects to see more use of natural sunlight in stores, which helps in sustainability and drives sales, creating more of an “open marketplace” ambiance, he explained.

In addition, he said he expects store design to shift away from straight, narrow aisles to more segmented departments, each with its own lighting and color schemes.

“We think there could be an emphasis on creating larger departments to improve the variety of customer experience in the store,” he said.

Morrison of architecture firm Little, however, said the traditional supermarket concept of surrounding the perimeter of the store with service departments that are connected to the back-end of the store will remain in place. Efforts to create “pod” service areas floating in the center of the store remain inefficient and impractical, he said.

Jonathan Ziegler, principal, PUPS Investment Management, Santa Barbara, Calif., said he expects to see major changes in product packaging by 2020, with shelf space being used more efficiently, packages designed for more efficient transportation, and more biodegradable packaging.

In terms of inventory, “supermarkets will really refine their mix,” he said. “Instead of increasing the number of line extensions, the number of SKUs will be reduced and thereby become more powerful, with a more productive SKU count in stores.”

He agreed that the use of the Internet will increase, with companies using Twitter to communicate with customers to drive and influence demand.

“There will also be interactive touchscreen and cell-phone communication, with ordering and payment done over the phone,” he said.

Store design will be more efficient, with less wasted space on fixtures and more productive replenishment systems, such as gravity-fed restocking systems.

“We'll see more use of just-in-time deliveries, with more pay-on-scan, where vendors will own the merchandise until it is scanned and sold,” he projected. “The advantage for vendors is, they won't have to deal with receivables when they deliver, but because it remains their product, they will be able to come into the stores on a regular basis and have better controls on out-of-stocks and shelf facings.”

Peterson of Cuhaci & Peterson said supermarket store design over the next decade could be driven in large part by the need for convenience.

“People are putting higher priority on their own time, so we see the trend for prepared meals growing, which will require larger refrigerated sections and quicker access in and out of the store,” he said.

Some larger stores will also offer more services to help people eat healthier, such as cooking schools.

Retailers will increasingly be split, he projected, between high-end formats that emphasize those types of services and low-end retailers that offer a more bare-bones experience.

“There will definitely be a distinction between higher-end stores and lower-end stores, and the lower-end store will offer less and less labor, and the higher-end stores will offer more concierge-level services and will price goods accordingly,” he said.

Art Turock, principal at Art Turock & Associates, Kirkland, Wash., said he expects in-store service levels to increase.

“I think we will see a time when retailers have dietitians in every store, as Hy-Vee is doing now,” he said. “I think that will become very common because there will be such an increase in chronic illness that retailers will see this as an important piece of the puzzle to create a strong brand equity for their health and wellness programs.”

In addition, he predicted that the produce area could become a full-service department.

“Produce is too important a department, based on the reasons people say they select a store, and having personnel in the produce department who are quite skillful in extolling the virtues of the various suppliers, the qualities of freshness, sustainability, locality, with good selling skills and the ability to offer samples will become very important.”

A service person could help acquaint customers with new items and how to use them, Turock explained.

“Retailers often regard produce as a matter of price, but they can overcome the price aspect with great, unusual and new tastes and by having someone there to advocate the health benefits of the products,” he said. “Having dedicated people trained and developed to do that would get around the issue of price-sensitivity.”

Stern of McMillan Doolittle said changes inside the store over the next decade also will involve using technology to reduce labor.

“In 2000, we would have talked about RFID, self-scanning, mobile checkout devices and electronic information kiosks, and in 2010 we can talk about RFID, electronic shelf labels and mobile payment systems,” he said. “And it's possible the biggest change in supermarkets could be the elimination of the front end altogether — we're not that far away from that now. The technology exists and costs are coming down, and I can see a radical change over the next decade in the way we process transactions.”

Rogers of DSR Marketing Systems said traditional supermarkets also have the opportunity to “raise their game” in perishables, prepared foods and organic foods, which could stem the loss of customers to Whole Foods Market or value organic retailers, such as Trader Joe's.

“The core opportunity inside the store is for the supermarket to become the consumer's agent, as pioneered in the U.S. by Hannaford and is now more the case in Europe,” he said. “Accordingly, rather than banning entire categories of products — as Whole Foods has done — this would mean offering consumers a choice but alerting them to products with, for example, low vs. high levels of salt or fructose, or not carrying specific brands with unjustified price increases. The industry's future is tied to the consumer, not the manufacturer.”