STRETCHING THE LIMIT

Lucia Moses

Walk into a typical Save-A-Lot, and you're likely to find it clean and tidy, if uninspiring. Products, mostly house brands, are stacked on the floor, still in their cardboard boxes. Signage is minimal and generic. Looking for the grocery bagger? You're it.

The limited-assortment channel is a small but steadily growing segment of so-called extreme-value retailing. Save-A-Lot, the biggest player with nearly 1,300 units, has been expanding at a rate of 10% per year for the past five years, according to Retail Forward. At its planned expansion pace, Aldi would have about 1,000 stores by 2010, up from about 800 today, Retail Forward said.

The short-term economic outlook is iffy. Inflationary pressures usually help his format, said Jimmy Gipson, chairman, president and chief executive of Houchens Industries in Bowling Green, Ky., with 200 Save-A-Lots from eastern Texas to western New York state. Houchens has been opening stores at a rate of about 20 per year, and hopes to keep up that pace. "Normally, the tighter money gets, the less people eat out," he said.

Yet sales at Save-A-Lot overall, as well as at dollar stores, have been soft lately. Surging gas prices may lead people to forgo restaurants, but they've had a bigger impact on limited-income consumers who are served by price-impact stores.

More important, though, to limited assortment's growth is median household income, whose downward shift stands to benefit the channel, said David Bishop, director at Willard Bishop Consulting, Barrington, Ill. Two factors are at work: the longer-term aging of the population (a group that also will prefer smaller, easy-to-shop stores, by the way) and its increasingly ethnic makeup. For that reason, Willard Bishop estimates the channel's share will grow to 2.6% by 2008 from 2.1% in 2003.

"It could be similar to the death by 1,000 lashes," said Bishop, who tracks small formats. "If supermarkets aren't carefully watching their competition, they could be unnecessarily exposing themselves to a vulnerability which, if left unchecked, could lead to more consumer defections."

The two principal players, Save-A-Lot, a subsidiary of Supervalu, and German-owned Aldi, have nearly 2,200 stores between them. A potential emerging player is Associated Wholesale Grocers in Kansas City, Kan., which launched its own bare-bones franchise in 2001 under the Always Low Price Store banner. Today, there are 21 ALPS stores, which measure up to 15,000 square feet and carry 1,500 mostly control-label stockkeeping units it advertises as "lower than elsewhere."

Limited-assortment stores share size, variety and price aspects of other small and extreme-value formats, like convenience stores and warehouse-style stores such as A&P's Food Basics. They're distinct, however, in their box size (usually less than 20,000 square feet), sparse assortment (1,500 or fewer SKUs, mostly center aisle store brands), and frills-free atmosphere.

The limited-assortment customer base is 40% to 60% low-income, similar to that of dollar stores' base, Bishop said. "When you look at the limited-assortment shoppers, the primary reason they shop an Aldi store is price," he said. "Assortment, in comparison, would be 7% to 8% of the reason."

Indeed, these stores claim shoppers can unvaryingly save up to 50% off supermarket prices. In a November 2003 price comparison in the Chicago market, Willard Bishop found that a basket of 12 commonly bought food and nonfood items such as mustard and paper plates at an Aldi cost 26% more than Wal-Mart but 80% less than Jewel/Osco.

"People realize fairly quickly, for a lot of those core center aisle items, they can get them a lot cheaper, whether at Wal-Mart or at the limited-assortment stores," said Nick McCoy, senior consultant at Retail Forward and author of an April report on the food channel. "It's another pressure on traditional supermarkets."

Because of their price positioning, Bishop sees limited assortment stores' main target as conventional supermarkets. Operators said the competition varies somewhat by market, however. Gipson said it's really the small, 25,000-square-foot store that's most vulnerable. "Once you get to the 40,000, variety becomes one of the reasons people shop there."

Another licensee is Niemann Foods, Quincy, Ill., whose 22 Save-A-Lots in four Midwestern states are growing same-store sales at an average rate of 8% to 10%, according to Tony Howard, director of operations. Howard said in some of his markets, the chief rival is Aldi, followed by Wal-Mart.

"I think when we talk about retail and price positioning in the market, I know for a fact we work off Aldi and Wal-Mart," he said. "I know as a company, Save-A-Lot works to make sure we have a respectable price difference between Aldi and Wal-Mart." Supervalu declined to comment for this story, saying it was in a quiet period due to its upcoming earnings announcement.

The core customer for these formats is likely to remain the low-income shopper. But that's changing. Higher-earning customers are using limited-assortment stores as they do dollar stores and Wal-Mart: for cheap staples and discretionary household items.

In the case of limited assortment, convenience also is a draw.

"The concept was born on below-poverty-level consumers," Howard said. "But in today's market, I believe that the convenience store aspect, because we are located generally in the inner city or the older downtown areas, the higher-end customer also goes into play."

In addition to aggressive new-store-opening plans, Save-A-Lot and Aldi also are retooling to target that more affluent household. Save-A-Lot has been offering more produce, meat and dairy; updating its sign packages; and increasing store lighting. It's also introduced more national-brand products, in-and-out deals it promotes as "Temporary and terrific."

It's been incorporating $1 general merchandise into some stores, a result of Supervalu's 2002 purchase of the Deal$ -- Nothing Over A Dollar chain. As of June, 38% of Save-A-Lot stores had been converted into combination dollar/discount food stores, and Supervalu has said it planned to convert all Save-A-Lots to the new, larger format. "They do very well," Howard, who operates four such combo stores, said of the dollar items. "Distribution is good, margins are good, and sales seem to be growing in that category."

Gipson said all these cosmetic and assortment changes, which he said started in the mid-1990s, have helped Save-A-Lot grow its customer base. Today, he said, "It's not a store you're ashamed to be seen in."

Charles Youngstrom, president of Aldi U.S., declined through a spokesman to be interviewed for this story. But Howard said that in several of his markets, his competitor has opened units in more upscale neighborhoods while upgrading its stores' signs and colors. "Aldi has always been paneled walls and dark floors," he said. "Now they have the tan and the green. I think they're going after, again, the convenience shopper who may not be price-driven but may not feel comfortable in a store that's not clean and friendly."

Aldi also has introduced more perishables and national-brand items. Temporary "Special Purchases" on national brands and big-ticket household items add to the treasure-hunt experience; recent deals included an acoustic guitar kit for $79.99. Last month, it added 10 ethnic frozen dinners to its gourmet-style Grandessa line, which already includes mini-eclairs, fruit juice bars and smoked chicken sausages. In doing so, Aldi hasn't lost sight of its core customer: the dinners range in price from $1.99 for an individual-sized serving to $4.99 for a four-serving package. The retailer also recently launched international wines and six-packs of beers that range in price from $2.49 to $4.99.

These hard discounters are formulaic, but operators cater to local wants on a store-by-store basis. Pat Raybould, president of B&R Stores in Lincoln, Neb., with three ALPS stores, has put in Hispanic sets in response to the growing immigration population in his markets. Howard said although they're not part of the corporate program, he carries Mission tortillas and direct-store-delivery soda because customers want them.

"We have found that our consumers, do they like the 59-cent Save-A-Lot soda? Yes," he said. "And we do very well with that. We also have consumers who won't buy any other than name-brand soda."

Jon Hauptman, vice president at Willard Bishop, also noted that Aldi direct markets via its online site, where shoppers can sign up for weekly ads, sale items and new-product e-mail alerts. "What they're doing is direct-to-consumer promotions on a weekly basis. It shows how Aldi is almost putting a personal touch on their shopper communications."

Running these stores is tough. Limited-assortment operators don't have to worry about maintaining elaborate displays or running promotions, but they do have to pay great attention to assortment, operations and labor costs.

With relatively few items, each has to be the right one and available without exception. That's where efficient use of labor comes in. "Being consistent is even more important in this business," Howard said.

Operating costs are below those of conventional markets, but lower prices on products means a lot of volume and transactions and lower rings, Raybould has discovered. "It is a challenge, getting these stores to work and to click."

As they attract higher-income shoppers, these stores will have to pay more attention to store appearance and service. "I think as more discriminating shoppers start to shop there, there's going to be the expectation to have higher standards," Bishop said.

At the same time, operators have to preserve their price image. "We carry Frito-Lay, but we also have to make sure we are a value on that item," Howard said. "Otherwise, you're destroying your price image. It's definitely a fine line you have to walk to figure out what is the best thing for that store."

There's no shortage of competitors. In addition to each other, Aldi and Save-A-Lot also have to contend with all other food channels, especially dollar stores, which target the same type of customer and are opening stores at a faster rate. "That's really the only other format with a similar value proposition, and dollar stores are focusing more than ever on selling groceries," Hauptman pointed out.

Dollar stores are becoming a more accepted channel for food, McCoy agreed. "That poses additional competition for the Save-A-Lots and Aldis of the world. And there are a lot of dollar stores out there."

Still, recent economic indicators suggest limited-assortment operators need not worry too much. Consumer spending and income posted declines in August, while consumer confidence took a hit in September. As food retailing increasingly polarizes at the value and upscale ends, supermarkets that haven't staked their future on the latter leave themselves particularly vulnerable to limited-assortment stores.

The best way for conventional retailers to fight back is to make stores easier to shop, have the right SKUs and price them right. That means knowing what consumers consider a good price, said Bishop, who sees supermarkets increasingly pricing items according to that "everyday fair price" principle. "What's most important is knowing what the items are that your customers value most."

Main players at a glance

Aldi U.S.

Ownership: Aldi, Germany

Number of units: Nearly 800 in about 26 states

Store size: Typically 12,000 square feet

Assortment: 600 to 700 stockkeeping units, mostly non-perishable, up to 95% private label

Proposition: Save up to 50% on groceries

Save-A-Lot

Ownership: Supervalu, Eden Prairie, Minn.

Number of units: 1,287 stores (411 corporate-owned and 876 licensed) in 37 states

Store size: 14,000 to 18,000 square feet

Assortment: Average of 1,250 mostly private-label food items, mostly non-perishable

Proposition: Save up to 40% over conventional supermarket prices

Sources: Companies, Retail Forward, Planet Retail