THE CASE FOR SMALL STORE FORMATS Presented by Dr. David Rogers DSR Marketing Systems Inc. E-MAIL: dsrms@sbcglobal.net Presented at The 2014 Gravitec Development Conference Clearwater Beach, FL May 8, 2014 COPYRIGHT 2014. DSR MARKETING SYSTEMS INC. 1 WHAT ARE WE DISCUSSING? • Small grocery store formats • 8,000-25,000 sq. ft. (total area) • Update from 2009 Gravitec Conference. 2 WHAT ARE WE DISCUSSING? (cont’d) • Two (2) main genres of small formats:1. 2. Gourmet/Natural/Organic/Perishables Limited Assortment Stores • But also “Blended” small store formats. 3 GOURMET/NATURAL/ORGANIC/PERISHABLES • Balducci’s • Natural Grocers by Vitamin Cottage • Earth Fare • New Seasons • Fresh Thyme • Sprouts • Lucky’s Market • The Fresh Market • Mrs. Green’s • Trader Joe’s 4 LIMITED ASSORTMENT STORES • Aldi • Ruler • Grocery Outlet • Save-A-Lot • Lidl?(not yet!) • Valuland 5 BLENDED FORMATS • Bottom Dollar • Smart & Final • Dollar General Market (?) • Walmart Express • PriceRite 6 SMALL STORE FORMAT POSITIONING Balducci’s Earth Fare Mrs. Green’s New Seasons The Fresh Market Higher Pricing Lower Pricing Aldi Dollar General Market Grocery Outlet Ruler Natural Grocers/Vitamin Cottage Trader Joe’s Walmart Express Fresh Thyme (?) Henry’s Lucky’s Market Sprouts Bottom Dollar Save-A-Lot Valuland PriceRite Limited Selection Wider Selection Perishables Selection 7 RECENT GROWTH • Together with Supercenters, they are the growth formats in the U.S. supermarket industry. • Accounted for 61% of the net growth in new grocery stores, 2007-12. • But the picture is “clouded” by Whole Foods. • Progressive Grocer data: 2007-2012:- 8 STORES BY FORMAT: 2007-12 Format 2007 2012 Conventional 26,832 26,791 -41 Supercenter 3,038 3,861 +823 Limited Assortment 2,349 3,088 +739 Natural/Gourmet 2,199 2,650 +531 Warehouse 457 487 +30 Commissary 172 176 +4 34,967 37,053 +2,086 1,152 1,261 +109 TOTAL Clubs Change 9 SALES BY FORMAT: 2007-12 ($bn) Format 2007 2012 % Change Conventional 357.5 401.8 +12 Supercenter 141.7 148.4 +5 Limited Assortment 11.0 15.2 +38 Natural/Gourmet 17.7 28.5 +61 Warehouse 3.3 3.8 +15 Commissary 4.2 4.8 +14 535.4 602.6 +13 101.5 122.3 +20 TOTAL Clubs 10 SUPERMARKET SALES BY FORMAT, 2012 Format # Stores % Sales % Conventional 26,791 72 401.8 66.7 Supercenter 3,861 10 148.4 24.6 Limited Assortment 3,088 8 15.2 2.5 Natural/Gourmet 2,650 7 28.5 4.7 Warehouse 487 1 3.8 0.6 Commissary 176 + 4.8 0.8 37,053 100 602.6 100.0 TOTAL 11 LAS MARKET SHARES: INTERNATIONAL COMPARISONS % Market Share 2007 2012 Change Germany 35.5 34.8 -0.7 Canada N/A 36.0 N/A U.K. 4.8 6.9 +2.1 USA 2.1 2.5 +0.4 12 REASONS FOR CONTINUED GROWTH Demographic trends • Aging of the population (distaste for large stores). • Increased attractiveness of urban living (the “new urbanism”). Large stores less feasible/necessary. • Smaller households. Less need for product selections. 13 REASONS FOR CONTINUED GROWTH (cont’d) Lifestyle/social trends • Increased health concerns, problems > natural/organic/ perishables stores. • Increasing time pressures/disorganized lifestyles > more quick, fill-in trips. Favor small formats. • Concerns about food deserts in deprived areas. 14 REASONS FOR CONTINUED GROWTH (cont’d) Income trends • Falling real incomes > multi-store shopping patterns. Favor LAS and other price formats. • Cuts in SNAP and Unemployment Benefits programs. • High gas prices dissuade long trips to large Supercenters. 15 REASONS FOR CONTINUED GROWTH (cont’d) Competitive factors/opportunities • Low standards/unhealthy image/male shopper orientation of U.S. c-stores. • Mediocre perishables standards (and high prices) of many conventional supermarkets, e.g. Dominick’s “Fresh” stores. • “Convenience” competition – for female shoppers - from Drug and Dollar stores > forcing response. 16 REASONS FOR CONTINUED GROWTH (cont’d) Online Retailing • Online is reducing non-food margins which are key to Supercenter economics, e.g. Carrefour, Tesco Extra. • Online is also reducing attractiveness of large stores which offer wide - but never comprehensive - product selections….the Big Box Category Killers from the 1980’s are dying. • Online growth favors small store formats as pick-up points. 17 REASONS FOR CONTINUED GROWTH (cont’d) Real estate issues • Environmental/traffic/zoning resistance. Especially to Walmart. Favors small stores. • Continuing real estate glut providing easy, lower cost development opportunities for small formats. • Book, consumer electronics, music, office, toy sectors are being decimated by Online retailing. End of the Big Box Category Killer era. 18 BUT IMPORTANT CONSTRAINTS • Limited selection > inconvenience of extra stop. • Small formats need powerful, positive image differentiation on one or more key dimensions for success….targeted offerings. • Many are also highly targeted demographically. • Therefore, vulnerable to inadequate/weak site research. 19 IMPORTANT CONSTRAINTS (cont’d) • Many failures (Fresh & Easy, Fresh Market closures, Jewel’s Urban Fresh, Walmart’s Marketside, Mrs. Green’s, Planet Organic). • Typical of new growth concepts, e.g. Clubs in the 1980’s1990’s. • Inadequate operational disciplines have hurt many small formats – especially domestic LAS ventures. 20 IMPORTANT CONSTRAINTS (cont’d) • Excessive SKU’s > inflated labor costs > inadequate price differentiation. • Small stores have limited sales volumes and fragile economics. • Lower volumes and profits per store have encouraged excessively fast rollouts and “corner-cutting” on Site Research. • Reinforced by naïve senior management perceptions of lower investment risks per store. 21