Is the industry overstored with the wrong format?

Looking to the future, a panel of experts at the 23rd annual SN Financial Analysts Roundtable pondered what the upheaval sparked by Amazon-Whole Foods — in accelerating the omnichannel transition, among other industry changes — will mean for brick-and-mortar grocery retailers.

One thing, they agreed, is that chains will need to re-examine their physical store space.

“In the long run, we're way overstored because whatever you think home delivery's going to get to, at least that amount of square footage has to come out. And usually it's less productive square footage,” said Andrew Wolf, managing director in the equity division at Loop Capital Markets. “If you think we're going to get to 10% penetration of home delivery in five years, square footage has to come out of something over 10%.”

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Retailers — especially conventional grocers — also will have to continue experimenting with formats, analysts said.

“The problem with the supermarket industry is not that they have too many stores. They have the wrong size store,” noted Scott Mushkin, managing director of consumer research at Wolfe Research. “A lot of the things we buy all the time — Cheerios, toilet paper, paper towels, cleaning supplies, etc. — are very susceptible to going online or click-and-collect, and that leaves you with a store that's the wrong size and probably the wrong layout. This poses lots of challenges as the consumer goes omnichannel and lots of advantages for Amazon-Whole Foods and Walmart.”

As a result, Christopher Mandeville, equity analyst at Jefferies, expects to see more automation in the center store, enabling retailers to better focus on categories that draw consumers to their stores to shop.

“We have too much of the same type of store — the traditional grocery store that doesn't have any element of differentiation and is not strong on the perimeter and is very much reliant upon what's going on in the center of the store,” he explained. “Even the better players, whether it be Walmart, Kroger or whomever, need to adjust accordingly. And that's part of the reason why you see Walmart piloting a program with Alert Innovation, in which case they're going to completely dislocate the entire center of store and automate so that you can order while you're walking around the store, shopping for something else, or prior to even entering the door.

“So I think automated fulfillment from the store level, particularly when it comes to center-of-store items, is going to be meaningfully important on a go-forward basis to basically cover all of your fixed and operating costs for the four walls,” Mandeville said.

The convenience of one-stop shopping — the ability to perform multiple shopping tasks on the same trip — shouldn’t be overlooked either because it’s seen as a plus by many consumers, Wolf noted.

“It goes back to the original thesis of the supercenter, which was you had to have cross-shopping,” he said. “Walmart had kind of let the grocery side of the store go out to sea for a few years, if you will. Now customers are noticing that side of the store is good, and they're cross-shopping.”

Added Mushkin, “A lot of our research shows that particularly for Millennials, the traditional supermarket format is not all that popular. That's not true with the supercenter. The supercenter remains a very popular place to go shop.”

A retail channel shift between traditional supermarkets and mass merchants that began in the late 1990s and early 2000s appears to be continuing, albeit in a different form, according to Mushkin.

“It seems that we're getting a second wave of a major channel shift, as we look at the volumes being put up at Walmart, Target and Amazon-Whole Foods and then compare it to the results we're seeing out of the likes of Albertsons, Ahold and Kroger,” he said. “There's no doubt we're seeing a pretty significant channel shift again. Now whether it lasts or not, we'll see. But there's no doubt it's happening.”