Why Supermarkets Are Becoming Each Other's Customers

Supermarkets are known for taking their cues from the customer. That would have to be the consumer, correct?

Until recently, the answer was yes. But some retailers now have a broader definition of the customer that goes beyond the consumer. That's because they are exploring new ventures to market their services or products to other retailers or food companies. Safeway is out front in this trend but is not the only practitioner.

Most supermarkets would not have seriously considered such business extensions a few years ago. They were having enough trouble maintaining their core shopper bases in the face of alternate format competition. But grocers have unquestionably become more innovative, and now they feel they can market their new expertise, assuming the challenging economy doesn't derail the trend.

Why is Safeway the all-star in this game? It plans to sell two of its private-label lines, O Organics and Eating Right, through other venues, and has already established a distribution partnership in the food-service channel with Sysco in Northern California. It is selling O Organics through retail outlets in Asia and South America. Its Blackhawk Network gift card business is the gold standard in the category, with strong penetration at other retailers. Safeway also hopes to market its health care knowledge to help other companies with costs and programs.

Meanwhile, Hannaford Bros. plans to license its much-praised Guiding Stars nutritional shelf-labeling system to other retailers and possibly suppliers, all of whom are clamoring for a credible standard to reduce the confusion about food and health.

The wholesaler community has also been impacted by this trend. Wakefern Food Corp. is seeking new wholesale customers outside of its network. It has struck a supply deal with Gristedes, New York, to distribute more than 7,000 ShopRite private-label items in addition to branded nonfood and health and beauty items.

It's not too much of a stretch to imagine many other cases where supermarkets can market their expertise. For example, why couldn't the Delhaize Group extend the reach of its new grab-and-go home meal solutions program for its U.S. chains, called “On the Go Bistro”? The initiative, which leverages Delhaize's experience in Europe, focuses on chilled, prepared meals. It sounds innovative and will be sold at Delhaize chains such as Food Lion, Hannaford Bros., Sweetbay, Bloom and Bottom Dollar. But those chains operate in limited regions of the U.S. Why couldn't the program be marketed to non-Delhaize chains elsewhere in the country?

Similarly, supermarkets with extensive expertise in community service or per-imeter departments could sell consulting services to other retailers.

Still, this isn't a risk-free enterprise. Safeway has diversified itself and forecasts that Blackhawk will represent 25% to 30% of earnings growth over the next five years. That's great news, but is there a lower barrier to entry for such nontraditional initiatives compared to the core supermarket business? Possibly so, which means supermarkets will become more vulnerable to new competitors even as they become more diversified.