NEW YORK— The supermarket industry is changing but not in the way it has in the past. The accumulation of stores by super regional players that dominated events in the sector for decades has given way to a more diverse reality with better regionals enjoying significant success and the European deep-discount format making inroads.
If they succeed and expand, particularly in new retail environments such as the urban milieu they are exploring in New York City, better regional supermarkets and deep-discount grocers will drive further change in a food retailing sector that has been evolving rapidly for over a generation.
Events in the Big Apple demonstrate the potential for change in food retailing in communities across the United States. Wegmans, previously focused on suburbs and frequently the outlying fringes of those, plans to open a store in Brooklyn in October and already has begun hiring.
Lidl, which began opening U.S. stores two years ago primarily in suburbs and exburbs, debuted its first New York store in December in the borough of Staten Island. Further signaling a change in its initial launch strategy, Lidl made the Staten Island store its first leased location.
Wegmans is among a group of better regional supermarket operators in the U.S., better being defined as traditional in core format, but including elements such as competitively priced grocery, strong private label programs and broader-than-average assortment, particularly in prepared food and/or general merchandise. The group includes Publix and H-E-B as well as Wegmans. Harris-Teeter would have been accounted among them before its acquisition, in early 2014, by The Kroger Co. The definition can be stretched a bit to include Meijer as well, given the emphasis that the supercenter operator lately has put on food.
In the Consumer Reports annual ranking of grocery and supermarket chains, H-E-B’s Central Market format took the top spot immediately followed by Wegmans. The list includes everything from smaller gourmet chains such as Gelson’s, which came in at number 4, national specialist operations such as Trader Joe’s, number 5, and major alternative food retailers such as Costco, which was ranked at number 10, and Publix at number 11.
The better regionals have differentiated themselves by focusing on certain critical functions their customers care about and blowing them out from both a quality and quantity standpoint. Some have even gone as far as leveraging their prepared food operations by opening instore restaurants and pubs. Yet as they incorporate price-competitive core grocery and perishables operations, the better regionals remain middle class bastions as compared with gourmet grocers such as Whole Foods. For its part, Publix has expanded to a degree that it can be said to be approaching the super regional status of supermarket giants such as Ahold even if it isn’t quite in the same league as Kroger, or at least not yet.
Kroger, Supervalu, Albertsons, Safeway, and Ahold emerged into super status by core expansion combined with gobbling up regional supermarket chains. The motives for doing so were several, but pressure from more efficient alternative retail formats that incorporate food in various incarnations, including supercenters, warehouse clubs and dollar stores, certainly inspired supermarket operators to seek economies of scale.
Yet the strategy ran into trouble as corporate headquarters undermined the regional distinctiveness of the regionals they acquired at a time when local food traditions were emerging as a point of interest for shoppers. Also, consolidation of management around executives located in the headquarters made for less responsive regional operations that frequently couldn’t effectively leverage the cultures of the supermarkets purchased.
Under those circumstances, stores became more uniform and less able to respond appropriately to food traditions and trends as expressed in local markets, not to mention turns to vegetarian, vegan, no-GMO, gluten free and other diets becoming more prevalent among consumers concerned with wellness. So consumers who were becoming more aware of regional, ethnic and international food cultures, and wellness-oriented diets often found themselves searching for alternate retailers who could satisfy their changing preferences.
That’s not to say the super regionals have altogether failed. Kroger, although, it lately has experienced some growing pains of its own, has generally fared better than its major competitors, in part due to a regional sub structure that has made it more aware of localized consumer trends. Also, Kroger has demonstrated a willingness to gain expertise through acquisition or other investment as when it purchased supercenter operator Fred Meyer and better regional Harris-Teeter while investing to take control of dunnhumby USA, the American branch of a loyalty program consultant that had a successful partnership with Tesco in the United Kingdom and beyond.
Wegmans Grows In Brooklyn
The opening of the Brooklyn store, in the Brooklyn Navy Yard’s landmark Admiral’s Row, will be a milestone for the company as its first location in New York City. The Brooklyn store just missed being the growing chain’s 100th store.
“The Brooklyn store will actually be our 101st store to open,” said Wegmans spokesperson Marcie Rivera. “We are opening a store in Raleigh, NC, in September.”
Although the Brooklyn store is the company’s most urban, Wegmans has experience in densely populated suburbs and understands dealing with crowded environments. In fact, the nearest Wegmans location is in Woodbridge, NJ, which should provide the retailer with a practical sense of the local marketplace. However, the Woodbridge store differs in an important way from the 74,000 Brooklyn store.
“The Woodbridge store is about 130,000 square feet so it is much larger than our Brooklyn store will be,” Rivera noted.
The neighborhood where Wegmans will operate is diverse in ethnic and economic terms. Although the surrounding community includes high-rent zones and middle-class pockets that have been subject to gentrification, the store also is a block away from a major New York City housing project that has a lower income population.
According to Wegmans, the Brooklyn store will feature more than 60,000 SKUs, including more than 4,000 organic products, fresh seafood delivered whole and cut to order daily, hundreds of produce items and 300 varieties of imported and domestic cheese, and offer extensive restaurant-quality prepared foods department. The store also will operate a second-floor mezzanine bar, serving food and wine, beer, and spirits.
Wegmans maintains an everyday-low price grocery strategy, supplemented only occasionally with sales events and digital marketing including digital couponing tied to its Shopper’s Club loyalty program and social media. Stores include a substantial general merchandise presentation, with the Woodbridge store placing much of it smack in the center of the grocery section facing the checkout stands and under Home & Entertaining department signage. Not surprisingly, the store focuses on food and drink related housewares items and even includes an end cap with dedicated signage that informs shoppers how to purchase the glassware that is right for various wine types. Still, storage, cleaning, laundry and candles get fair play as well.
Wegman’s puts particular emphasis on addressing wellness issues and that should resonate in Brooklyn, which has become a preferred destination for young people flocking to the city but which also has a rich and even exploding food culture, which makes consideration about edibles prominent across demographic boundaries.
Wellness is a dynamic issue that food retailers have to deal with on an ongoing basis. Going back to Baby Boomers, who supported the growth of store concepts that provide alternatives to traditional food shopping such as warehouse clubs and natural food stores, consumers in the United States have been willing to break away from supermarket shopping as they discovered new retail formats that better addressed their developing preferences. Shoppers didn’t necessarily abandon supermarkets in the process, even if some did. Mostly, they supplemented supermarket trips with visits to other edibles destinations.
According to the Food Marketing Institutes U.S. Grocery Shopper Trends study, the central position of supermarkets for food shopping has stabilized but today, 49% of shoppers identify supermarkets as they primary food store of choice versus 64% in 2006.
Millennials also are fickle food shoppers according to Marsha Everton, principle, The AIMsights Group. They also demonstrate a willingness to cross shop, which may become more pronounced as they become parents and need to fill their grocery carts differently, and with more consideration paid to price and quality.
Millennials are not a homogenous group, Everton noted, no matter how they are portrayed. Income and life stage play a large role in how they make decisions. The Millennials that demonstrate the kinds of behavior that is associated with clichés about the demographic tend to be the wealthiest who, generally, will have the most disposable income. Others are more constrained and are compelled by the same economic constraints as other generations have been. Now however, life stage and a particular concern that really is typical of Millennials across the board are dovetailing and that will affect food shopping behavior.
“There is an overall emphasis on health and wellness,” Everton said. “Millennials are focused on health and wellness as are the baby boomers and they influence each other in their choices. When it comes to things like shopping local, there is a commitment to support local people and the local economy, but one of the real drivers is that the food is perceived to be better quality— you know where came from, and nobody has dumped a bunch of chemicals on it to protect it through a long journey to the store.”
Wegmans not only includes organic fresh foods but an organic own brand the covers grocery as well. It also has a locally grown brand it offers customers, From Family Farms Near Our Stores. In addition, Wegmans private label products have what it calls wellness keys, symbols that identify product health qualities such as fat free, vegan, high fiber, gluten free, among others.
Organic presentations, particularly when well priced, may be just what Millennials having children are seeking. According to Nielsen, Millennials were spending 14% more on organic products through 2018 than they had in 2017.
With all it offers, and the steady growth that has taken the company from its central New York base east to Massachusetts and south as far as North Carolina, Wegmans has had the confidence to keep on adding stores even in markets where it was little known. However, with the other best of the better regionals, it has a particular point in common; it is privately held. So, better regionals have become better, and growth vehicles, at least in part because they have the freedom, in the absence of Wall Street oversight, to make moves without having to deliver immediate returns and take risks without failure being portrayed as catastrophe.
“They are all unique, but they are privately held companies. That enables them to play the long game to invest in programs and people more so than can publicly traded companies,” Neil Stern, a partner in consultancy McMillon Doolittle, said.
Once, observers may have thought that privately held supermarket companies had limited growth potential, but many of the better regionals are confounding those expectations, even if their growth patterns may be a bit different that might once have been expected, as in H.E.B’s growth in Texas and Mexico. However, some are radiating out of their home markets just as the super regionals once did and may even be benefiting from the consolidation that occurred among the big publicly traded companies, which made new grocery operations that offered shopping choices welcome.
“Publix is now the fourth largest supermarket chain in the United States,” Stern pointed out.
If it enjoys success in New York, Wegmans has an entire new market available that doesn’t require it to expand geographically considering that it already occupies megalopolis and has the potential to add stores in Boston, Providence, Hartford, New York, Philadelphia, Baltimore, Washington, DC and other smaller cities where many urban neighborhoods are underserved by food retailers, whether they are lower income or gentrifying. The Brooklyn Wegman’s should show the company just where it stands in terms of consumer reaction to its operations
Lidl’s decision to amend its growth strategy may be a good rather than a bad sign as to the company’s future in the United States. Tesco, when it rolled out its Fresh & Easy store concept in the western U.S. missed the mark, in part because it used data it devised while working with Safeway in the years prior to its first store launches, which didn’t necessarily give it an accurate reading on the marketplace.
Safeway had some significant operational eccentricities at the time, including a private label program featuring goods that were in many cases priced higher than the national brands they were meant to supplement. Not long after Fresh & Easy began rolling out, Tesco realized that the small spartan stores it was stocking with budget gourmet, often exotic, food offerings, many of them prepared at its centralized food processing facility, were not attracting consumers at the pace expected. The company added signage and other elements to perk up the stores and shifted assortment to products that might better suit American tastes, but it was too little too late, particularly in the face of The Great Recession, and Tesco became another international food retailer that failed to establish itself in the U.S., a list that includes Carrefour, Auchan and Sainsbury.
Lidl more substantially changed its rollout strategy than did Tesco. The company initially expanded by building its own ground-up stores across less-dense eastern U.S. geographies in the Southeast and Mid-Atlantic states. However, when store expansion wasn’t proceeding to plan, the company announced that it would begin leasing spaces and moving into more urban localities including Staten Island.
The New York store debut followed on Lidl openings in two New York Metropolitan area suburbs in Union and Hazlet, NJ. The 36,000 square foot Staten Island Lidl was consistent in size with the 50 or so ground-up locations it had opened to that point. By the time of the New York opening, the company said it would look at in retail leases in buildings as small as 15,000 to 25,000 square feet.
At the opening, Lidl spokesperson Chandler Ebeier told HomeWorld Business that Lidl had not radically departed from its initial floor plan even is the dimensions of the location weren’t identical to the ground-up builds. So, as had been the case in the initial format, the Staten Island store placed bakery, floral and produce just beyond the entrance, making them the first departments shoppers encountered upon entering the store. Ebeier pointed out that the Staten Island store still provided shoppers with wide aisles and easy-to-shop convenience issuing from a floor plan that was kept as close to the Lidl standard as was possible in a renovated space.
In another departure for Lidl, the Staten Island location took over space in a shopping mall, albeit in a storefront with its own independent exterior entrance. The ability to provide a convenient location for shoppers was the major reason Lidl decided to try a mall location in Staten Island, Ebeier said, and, of course, it didn’t hurt the trial to place an unfamiliar retail banner in the midst of a consumer crossroads.
Given the autumn timing of the Lidl opening, the new store got an additional potential boost from holiday shoppers thronging to the mall. Many passersby might still be unfamiliar with the deep-discount format Lidl manifests, but a grocer in convenient proximity during the busy holiday season has a better than usual chance of getting a visit.
Lidl carries an abundant and potentially giftable assortment of sweets and seasonal products, too, in addition to most typical grocery items Staten Island consumers might need, even if in a private label form. Taken as a whole, holiday traffic, backed up by Lidl’s typical circular promotions, gave the store a chance to get its low prices out in front of unfamiliar customers in both food and general merchandise assortments. Product quality and value drive customer acquisition and retention, Ebeier noted. Opening in-store and in-circular deals included gift-appropriate housewares such as a $14.99 hand blender, electric salt and pepper mills, each $9.99, and stemless wine glasses, either 15 or 21 ounce, at two for $4.99.
Ebeier said that, since the store open, Lidl has been building out the product proposition.
“I can tell you that our assortment is larger with a greater breadth of products than ever, and we continue to expand and deepen it based on feedback from our customers. This is true across our entire store network, including in our stores with non-standard layouts like Staten Island,” she said.
Lidl and Aldi share any number of physical and operational similarities and one of them is in marketing. Aldi’s ability to establish itself in New York, where it operates stores in Queens and Brooklyn, suggest that Lidl’s outreach to Gothamites could find a receptive audience. Indeed, Aldi and its discount-gourmet cousin Trader Joe’s have managed to build significant businesses relying on their unique approach to the circular. But circulars are only a starting point and a way to draw and keep shoppers coming. Many Aldi and Trader Joe’s customers became enthusiasts then unpaid spokespeople for the banners, which they embrace as personal discoveries to be shared with their friends and family.
Lidl’s own circulars help establish the discount-oriented value proposition it offers across the store from fresh food to grocery to general merchandise. And it’s not only conventional products they tout. Lidl offers private label products that address a wide range of wellness considerations including non-GMO, gluten-free and organic merchandise, and it does so at prices that constitute significant savings versus specialty grocers that carry those items and even mainstream supermarkets that treat them as specialty products.
Customer advocacy will be critical if Lidl is to establish itself in New York. Lidl has two variations on the circular, a weekly flyer touting specific values and a more theme-oriented monthly magazine. Aldi supplements the circular with an app-based loyalty program, coupons on the main website and social media.
Although Lidl marketing begins with good ol’ fashion circulars, they remain a first engagement that, as shoppers who embrace the value, quality and convenience the stores offer become, Stern said, “evangelists who generate word of mouth advertising” whether in person or digitally.
Yet, the difference between Aldi and Lidl as regards to U.S. expansion may revolve around patience. Clearly, if Lidl can establish a significant presence in the U.S., it will firmly establish the deep discount format on American soil. However, Aldi spent more than 40 years quietly building its U.S. presence and mostly in communities where it could serve lower income shoppers. Only in the last decade has it updated its merchandising, assortment and store decor packages in a concerted effort to attract more middle class consumers.
Lidl, however, determined to move more quickly and have 100 stores in operation after about a year and a half from its 2017 launch. When things didn’t work as planned, Lidl reconsidered its pace of expansion, but its gearing up again.
In April of last year, Lidl delivered another twist on its updated growth strategy, announcing that it had acquired the Best Market chain, with 27 stores, mostly in suburban Long Island but including a couple of locations in New York City and a single location in New Jersey. Shortly thereafter, Ahold, the major super regional operator that dominates the Long Island supermarket scene, announced that it had purchased King Kullen chain, a 32-store chain is headquartered and operating in the market.
Although other grocers maintain stores on Long Island, including Whole Foods, the bulk are local and specialty operations, with the exception of the ShopRite group of stores. ShopRite’s are affiliated with the Wakefern cooperative and, although it is well regarded, its independent operators don’t act in the same accord as do supermarket chains and, as such, have a localized reputations and clientele.
The Ahold banner on Long Island operates a high velocity, limited assortment product strategy unlike Wegmans and even more typical supermarket operators, which provide a more abundant assortment. In making the move on Long Island, Lidl will raise its profile significantly and inherent traffic as the main grocery operator in a given community or one that only has a single competitor.
Aldi operates on Long Island but only in Suffolk County. The chain also has stores in Brooklyn and Queens. It has no stores serving Nassau County, and its 1.4 million inhabitants. If constituted as a city, Nassau would be the 9th largest in the United States, ranking between San Diego and Dallas. The soon-to-be Lidl Best Market chain operates several Nassau County locations.
Trader Joe’s operates five locations in Nassau County, but, given the population and the paucity of competition, it could be argued that the nearby presence of it and Aldi could be more benefit than detriment, given they’ve accustomed many Long Island consumers to a smaller, more private-label oriented grocery store concept.
Lidl is preparing its Long Island introduction, which, initially, will include four stores, including two transformed Best Market buildings in Huntington and Babylon, and two other locations: Center Moriches and Plainview, with the Plainview location replacing a Best Market in Hicksville.
“For the Long Island locations, the transitions will be a step-by-step process, and we expect those four stores to open by early 2020,” Ebeier.
Although the Best Market acquisition is a key move by the company, it isn’t the whole expansion story. In May, Lidl announced 25 total store openings it has in the works, listing locations in the Carolinas, Maryland, Pennsylvania and New Jersey as well as the four on Long Island.
“Of the 25 stores we forecasted to open by Spring 2020, two have had their grand openings: College Park, MD, in June and Hagerstown, MD, in July,” Ebeier said.
By the end of 2020, Lidl finally expects to have 100 U.S. stores open. As the company announced its plans through next year, Johannes Fieber, CEO of Lidl U.S. said, “We are committed to long-term growth in the United States and always strive to locate in the most convenient locations for our shoppers. These new stores are part of the next steps in our U.S. expansion. Over the next year, we are excited to introduce more customers to Lidl’s award-winning quality, reliably low prices and convenient shopping experience.”
Fieber’s statement actually points to an irony as to the success of deep discount grocery retailers: At a time when many consumers are changing eating habits and looking for more variety, deep discounters are scrupulously uniform. Shop one and you can shop them all without noticing a difference in layout or shopping pattern. Where they differ is in product, as at least part of the assortment changes every few weeks, as is true of Aldi and of younger, hopper Trader Joe’s.
In both cases however, occasional and seasonal product offerings create a treasure hunt experience in store. In the case of Aldi and Lidl, the treasure hunt strategy is particularly true in general merchandise, which changes seasonal line ups such that you can purchase anything from grilling tools to chain saws in spring and anything from wine flutes to toys in the fall. Lidl even carries limited indoor and outdoor furniture seasonally and, beyond the home, just a bit of low-price apparel. With that being said, TJX, Ross and Stein Mart may have helped prepare the market for Lidl as much as Aldi has.
Although Lidl has enjoyed great success in its native country and in many markets beyond, Stern said reports out of Germany suggest some directors on the Lidl board haven’t been enthused about the move to America. Whether or not that’s accurate, the company is spending big bucks in a market where European food retailers including Aldi and Ahold have struggled to make headway, and where others have failed thoroughly. After all, any European or other global grocer coming into the market has to deal with the high cost of winning market share in a saturated U.S. retail environment where almost all the big players sell at least some food.
“The jury still is out on whether Lidl can make it here,” Stern said. “It’s most important that they have intestinal fortitude to do it, especially in the executive suite in Germany.”
Still, Stern added, “Lidl has a significant amount of money to invest. They may have missed the market on the first go around, but if Lidl has a thousand stores in 10 years, it was just a bump in the road. Aldi struggled big time at first. It was perceived as the lowest of the low.”
That Lidl keeps experimenting with store formats at least suggests that the company is engaged with developing its U.S. initiative. Earlier this year, Lidl debuted a new and different store concept in Arlington, where the company located its U.S. office.
“We opened our Lidl Express store on the ground floor of our headquarters building to help bring the products our team works so hard to develop closer to our team here at HQ,” Ebeier said. “It is also open to members of the community. The store is about 1,000 square feet and offers a bakery, fresh produce and number of grab-and-go items.”
Although they have little in common superficially, Wegmans and Lidl both bring innovation to the food retailing market and a willingness to try new ways of engaging consumers. Their success, if they can break through with their latest initiatives, will change the way America shops for food and a limited but significant array of general merchandise, which may make them more of a force to be reckoned with going forward.