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Price, quality, divide market share for grocery stores

At one time, grocery shoppers made their purchasing decisions based solely on whichever supermarket offered the best value.

Among the challenges facing grocery retailers is how demand for organic foods has led to their proliferation in the marketplace, which can make it harder for a store to differentiate itself. (Photo by Dave Kuhn / The Daily Record.)

Now, as more retail food outlets are offering a greater variety and higher quality of food, many supermarkets are finding that mere price-cutting isn’t cutting it.

“Everybody wants to sell food,” said Phil Lempert, founder of SupermarketGuru.com, a food industry and criticism site.

He noted that grocery stores and supermarkets seem to be dividing into tiers, with stores like Whole Foods Markets, which focus on selling premium-quality goods at higher prices, occupying one tier, and dollar stores, which have been expanding their food-related offerings, in another. Myriad stores occupy the tiers in between.

Making an already complicated market even more crowded, supermarkets play a zero-sum game, according to Jie Zhang, associate professor of marketing at the University of Maryland Robert H. Smith School of Business. The country’s relatively low population growth means that if any food-seller grows, it’s doing so at the expense of a competitor.

According to Whole Foods Mid-Atlantic Regional President Scott Allshouse, Maryland has “a solid lineup of competitors” that other states don’t offer. Perhaps more than most, supermarkets and grocery stores in the state have faced serious challenges, which vary depending on their target demographics.

Cutting costs at any cost

Low-end stores face an unenviable dilemma. If a store makes low prices its biggest selling point, how can it keep customers coming when a bigger competitor can undercut it?

While superior customer service has been small stores’ counter to corporate behemoths, it doesn’t seem to be stemming the tide significantly. According to a 2012 Consumer Reports study, Wal-Mart has been among the least-liked grocers in the nation for years thanks to poor customer service and long lines — yet that same study notes it’s the nation’s largest grocer, and customers praise its low prices.

Some of Wal-Mart’s competitors offer experiential differences instead of waging a price war. These amenities can be basic; for instance, some stores in the Shoppers chain offer free Wi-Fi and areas to sit and eat prepared food.

The latter, according to Columbia Business School professor Rita McGrath, is “a relatively inexpensive way” to get customers to stay in the store — and hopefully spend more money.

Other stores, like the German-owned Aldi, aim to beat Wal-Mart at its own game and offer the lowest prices, even at the expense of some supermarket staples. Aldi doesn’t provide bags, accept credit cards or stay open outside of peak hours. Its website states that these measures keep unnecessary hidden costs out of the price of the food.

However, there are some necessities that no store can afford to skimp on. McGrath said no matter how low the prices, few customers will want to enter a store that’s “grubby-looking,” citing the financially troubled K-mart as an example.

Traditionally, supermarkets used loyalty programs to incentivize customers to avoid what McGrath calls “splitting the basket” — shopping at whatever store offered a given item for the lowest price, instead of sticking to one store for all food-related needs. However, according to Smith School of Business marketing professor Rosellina Ferraro, loyalty programs are so common that they are no longer sufficient.

“It doesn’t really help to distinguish one supermarket from another,” she said.

Further complicating the issue, new competitors in the food-retail space are arising from unlikely places. The financial advising website Morningstar.com warns would-be shareholders that dollar stores have weakened even the mighty Wal-Mart.

Lempert said dollar stores can thrive as food sellers thanks to “intelligent buying,” or buying goods at such low prices that they can profit even on selling cheap food.

But the new food retailers to watch, according to Lempert, are convenience stores. He said smaller storefronts, and thus more limited selections, work to smaller stores’ advantage.

“Do we really need to go into a store and see a hundred different brands of olive oil?” he said.

Stuck in the middle

Grocery stores are forming an “hourglass economy” — stores at the high and low ends are growing, but those in the middle are suffering, according to McGrath.

With low-end stores offering superior prices and high-end stores offering superior quality, mid-range stores have to be creative if they want to succeed.

Zhang said that middle-tier retailers’ chief problem is that they are unable to offer food that’s of significantly higher quality than their competitors, but can’t afford to charge significantly higher prices.

“It would not be wise for other food retailers, big or small, to compete head-on with Wal-Mart for price,” she said.

McGrath cited Kroger, a national chain that has no presence in Maryland, as a success in this regard, thanks to its decentralized approach that allows for significant store customization based on a community’s needs.

Lempert said since bigger chains can nearly always offer lower prices, a focus on intangibles can make a difference for struggling mid-range markets.

“The supermarket used to be the center of the community,” he said, adding that middle-tier markets needed to “stand for something” to survive.

Giant Food spokesman Jamie Miller said the supermarket stands for three things: “quality, value and service.”

“We’ve been the local grocery market of choice for [our] 70-year-history,” Miller said.

Giant’s website proclaims, “If it can make shopping a better part of your day, we’re behind it.” This isn’t a new policy, according to Miller — Giant installed the first computer-aided checkout service in 1979. Now the store offers a “Scan It!” service in which customers can scan items from handheld scanners or their smart phones as they shop.

“We’ve adjusted with the times,” Miller said.

Stores concerned with keeping up may consider adding what Lempert describes as an increasingly popular feature: on-site dietitians, offered at Shop-Rite and the Midwest-based Hy-Vee, among others. He said these dietitians help build relationships with customers, which ultimately keep them coming back.

Less crowded at the top

There is a growing third category of stores that have opted to focus less on the price war and more on offering customers something they can’t find elsewhere.

“We’re buying on the basis of experience,” McGrath said. “If we have a great experience in the store … then we’re likely to stick with it.”

According to Lempert, the shopping experience is where higher-end stores shine. He said at this level of stores, customers are “buying a relationship” that makes up for the higher-than-normal prices.

The stores’ employees play a crucial role in creating that experience.

“Their turnovers are less. Their employees make more money. They’re trained. They get benefits. They’re having so much fun,” Lempert said.

One of the leaders in this premium market is Whole Foods. Allshouse said all employees are trained to teach customers what’s in a particular food and how to prepare it. He also said Whole Foods is known for its friendly atmosphere.

“If you walk in, you’re going to be among friends,” Allshouse said.

Wegmans’ director of media relations, Jo Natale, said her company will spend as much as $1.8 million to train employees at a store set to open in Germantown, including teaching cooking techniques.

Another key reason for growth in the high-end tier of supermarkets is the increasing popularity of organic food, the grocery buzzword.

While Whole Foods is known for its large selection of organic products, it’s not alone. Allshouse said the growth of farmers’ markets, while encouraging overall, cuts into Whole Foods’ sales. Regional competitors like Fairway (based in New York) and Sprout (based in the Southwest) were a large part of Whole Foods’ slowed growth in the past quarter, according to a Bloomberg report.

But keeping up with the trends comes at a cost.

“What people don’t realize is, there isn’t an unlimited supply of organic food,” said McGrath. This limited supply, in addition to the extra labor needed to grow organic produce, could become problematic as consumers demand more organic foods.

Stores in this category take steps to avoid pigeonholing themselves as luxury retailers. Natale said Wegmans employees insist they don’t work at a high-end store, and Allshouse, while conceding “we will never sacrifice quality” for lower prices, said affordability and quality are not “mutually exclusive.”

Yet both Whole Foods and Wegmans forgo some of the familiar money-saving measures customers may be used to. Allshouse said Whole Foods doesn’t offer loyalty cards, and Natale said that Wegmans doesn’t offer weekly sales, opting instead to keep prices consistently low.

“If you want to shop at Whole Foods on a budget, you can do it,” Allshouse said.