No-Frills Shopping Gains Ground

Consumers are hunkering down. As the economic crisis deepens, they are eating out less often, switching to less-expensive, private-label brands and rethinking where they shop, particularly for groceries. All of this bodes well for supercenters and for a niche category that has flown under the radar for some time: extreme-value grocers.

“In a time when shoppers are pulling back on their spending and there is a lot of belt-tightening going on, extreme-value supermarkets certainly are one of few winning formats across food, drug and mass retailing, and really across all retailing,” said Sandy Skrovan, senior VP, TNS Retail Forward, Columbus, Ohio.

Offering a limited assortment of grocery basics at rock-bottom prices in a mostly no-frills environment, deep-discount supermarkets are gaining ground as shoppers across all income levels discover they don’t mind bagging their own groceries.

In May 2008, one in five shoppers (20%) told TNS that they were changing where they shop for groceries and other consumables. But by November 2008, the number had jumped to nearly a quarter of shoppers (24%).

About a quarter of shoppers who have switched the stores they shop due to economic conditions say they are shopping at extreme-value retailers more often now than a year ago.

“As shoppers look to trade down, Wal-Mart, dollar stores and extreme-value supermarkets are gaining shopping occasions at the expense of other retailers, including conventional supermarkets,” Skrovan noted.

Aldi: Coming on strong in the extreme-value sector is German-owned Aldi (short for Albrecht Discount), whose 2008 U.S. sales are expected to climb 21% to $7 billion, according to Planet Retail. With its low overhead, the no-frills retailer has perfected the less-is-more philosophy. Stores average 16,000 sq. ft. to 17,000 sq. ft., including 10,000 sq. ft. of selling space, and carry 1,400 SKUs, with almost 95% of the goods sold under the company’s own private labels. (By comparison, conventional supermarkets average 47,500 sq. ft. and carry 45,000 items, according to the Food Marketing Institute.) The selection is comprised of core, high-volume grocery basics, often in a single brand in a single size.

By almost every measure, Aldi runs a lean operation. It doesn’t offer in-store banking, pharmacy or any of the other non-essential grocery store services found in most conventional supermarkets. It accepts debit cards, but not credit cards or checks. There is a nominal charge for paper or plastic bags, and stores are open only during popular shopping hours.

But what the chain lacks in variety and amenities it makes up for in rock-bottom prices. In a recent Aldi competitive-price study, a basket of 184 items described as “very important to customers” averaged $286.37 across its stores versus an average $401.47 for the combination of discounters, big-box outlets and traditional supermarkets.

With nearly 1,000 stores in 29 states, primarily from Kansas to the East Coast, Aldi has plenty of room left for expansion. It has 75 new U.S. stores on tap for 2009, including its first-ever location in Manhattan.

There is no doubt that the economic downturn has expanded Aldi’s appeal. At the same time, however, the retailer has been quietly making some concessions to middle-class tastes. Its new prototype is brighter and boasts a more modern look, with upgraded decor, colorful wall graphics, higher ceilings and more natural light. The updated design is being featured in all new stores.

Additionally, during the last few years, the chain has introduced fresh meats and added more produce. About 40% of its store space is now devoted to fresh, refrigerated and frozen foods. It has also added specialty brands, such as its health-oriented Fit & Active label.

Other major players in the extreme-value category include Save-A-Lot, a subsidiary of Supervalu, which operates approximately 1,200 stores (with some 300 corporate-owned and the rest licensed). The chain, which says it delivers savings of up to 40% compared to conventional supermarkets, carries about 1,200 of the most frequently purchased grocery items.

Supervalu plans to open 50 to 60 Save-A-Lot locations this year. Supervalu CEO and chairman Jeffrey Noddle spoke to Save-A-Lot’s performance in a January call with investors.

“Save-A-Lot is as well positioned in this economy as any competitor on the landscape in my view,” he said, and noted the chain’s “very, very good solid results.”

A new and slightly different contender in the extreme-value category is Boulder, Colo.-based Sunflower Farmers Market, whose 20 stores are a cross between a no-frills Whole Foods Market and Trader Joe’s. The company, founded by Wild Oats Market’s Mike Gilliland, plans to open eight stores in 2009.

As to how the extreme-value boom will affect conventional grocers going forward, experts say much depends on how long the recession lasts and, more importantly, if shoppers will retain their new behaviors or revert back to old shopping patterns once the economy begins to pick up.

“Regardless, expect extreme-value supermarkets to chip away at some conventional supermarket categories—largely center-store categories where they can’t afford further market-share slips,” TNS’ Skrovan said. “I think we will see market-share shifts on an aisle-by-aisle, or category-by-category” basis more so than any big shifts in total share.

Supercenters: While supercenters operate on a much different model than extreme-value stores, they are also riding a wave of popularity. According to an analysis of 2008 unit sales by The Nielsen Co., U.S. consumers increasingly are relying on supercenters, with increased spending seen across nearly every department. In fact, the supercenter category was the only retail channel to post overall unit sales growth, albeit a modest 1%.

“Where we really start to see the expanding reach of the supercenter is in grocery, where a shift is occurring in everything from dairy and produce to meat and frozen foods,” said Todd Hale, senior VP, Consumer & Shopper Insights, The Nielsen Co.

Wal-Mart Stores’ superstore division is head and shoulders—at roughly $200 billion in sales for 2008—above all other supercenter competitors. (In 2003, Wal-Mart became the largest U.S. food retailer, largely through the expansion of supercenters.) The company expects to open 166 domestic supercenters in fiscal 2009, and 125 to 140 new units in 2010. Stores average 187,000 sq. ft.

There is no mystery as to Wal-Mart’s commitment to its supercenter brand.

“Supercenters continue to have the highest rate of return of our U.S. formats,” executive VP and CFO Tom Schoewe said at the chain’s annual analyst and investor meeting in October.

The sales generated by Wal-Mart’s superstore division far outpace that of its rivals. The 239-store SuperTarget garnered an estimated $14 billion in sales in 2008, while Meijer, with 185 stores, rang up an estimated $13.6 billion in sales in 2008.