Food shopping is one of those menial tasks that everyone must do, so it seems that in the land of grocery retail, profits and expansion should always be steady. But the grocery industry is rapidly changing. With the rise of online shopping and Internet giants like Amazon purchasing Whole Foods, keeping profits in the black are a constant source of pressure.
“The grocery industry has been highly competitive for the entire 20 years I have been in commercial real estate,” said David Donato, senior vice president for Continental Realty Corporation, a commercial real estate firm. “Margins are thin, there are spoilage and waste, and there are ongoing real estate and labor costs that make it tough to be consistently profitable.
“The growth of Wal-Mart, wholesale clubs and Amazon make it harder,” he added. “These are large providers with big buying power. As they drive down prices for consumers, the margins get thinner for smaller chains who do not have such buying power.”
Overall, grocery openings were down 28.8 percent from 2016 as some grocers reined in expansion plans, according to a 2018 report by JLL, an independent professional services firm. Maryland has seen an increase in total new grocery space, growing from 2.4 percent to 4 percent from 2016 to 2017, according to the report.
Many of the area’s traditional mid-price grocers are slowing expansion or retracting. Mars closed all 17 greater Baltimore locations in 2016. Albertson’s, the parent company to Acme and Safeway, has slowed its expansion of new stores.
The JLL report notes the grocers that excel are those focused on their key differentiators, such as healthy foods, affordable offerings and private labels.
Investing $3.4 billion, ALDI is one of those grocers putting forth an aggressive expansion effort. Focusing on its shopper value and small footprint, the German-founded grocer now also offers healthy food options to attract an even broader audience. ALDI has more than 40 stores in Maryland, with new stores opened in Frederick and Laurel. Additional store openings in Timonium, Rockville, Hanover and Salisbury are in the works. Nationwide, the grocer operates nearly 1,800 stores in 35 states and plans to increase store count to 2,500 by the end of 2022.
Jeff Baehr, ALDI’s Frederick Division vice president, is not worried about competition impacting their growth strategy.
“As one of the fastest-growing retailers with a long-rooted history in the U.S., we don’t worry about what others do. We focus on providing people with outstanding value on quality food and products,” Baehr said. “Our sales have doubled in the past five years, and we expect them to double over the next five years. Giving people great food at affordable prices will always be in style. Through our extensive expansion, store remodels, innovative, flexible business model and continued investment in online shopping, we are well positioned for the future.”
Cailey Locklair Tolle, president of the Maryland Retailers Association, the organization that manages the Maryland Food Council and advocates for grocery merchants, says that the U.S. Supreme Court’s decision in South Dakota v. Wayfair levels the playing field for brick-and-mortar merchants competing with online convenience and prices.
“Out of all of the sectors of retail, grocery has the smallest profit margin. The national average is about 1 percent profit, which is very small. When you think about how competitive the marketplace is becoming, any major changes that happen would affect sales, would harm grocery, especially brick and mortar grocery,” Locklair Tolle says.
Focusing on the perimeter of the store is what Scott Streett believes has kept his independent grocery store, Harvest Fare, in business. Bigger chains often address market changes by cutting labor, which often means outsourcing the perimeter items: fresh baked goods, deli and meat. But Harvest Fare remains one of the only grocers that offers goods baked daily and one of the few that still cut meat and fish in-house.
Harvest Fare’s first store opened in 1996 in the Hamilton neighborhood of Baltimore. In 2011, it took over a space in Fallston that was formerly leased by Acme. Acme left the location because a Super Walmart opened up half a mile down the road, but that did not deter Streett. In 2013, Harvest Fare partnered with Ace Hardware, offering 3,500 square feet of hardware merchandise within the Fallston location.
Streett believes a major part of their success is being active in the communities in which they are located. Streett’s father and the founder of Harvest Fare, Jim Streett, sits on the board of the Hamilton Lauraville Main Street organization, and is a member of the Hamilton business association. The store also shifted merchandising to focus on local products.
Additionally, each year, the store holds a Super Bowl Sunday Sale event, attracting hundreds of customers for a “block party” and special savings. While they are quietly expanding (they are opening another store off of Wabash Avenue in west Baltimore) Streett said for independent grocers like his, focusing on local products and the perimeter is the key to success.
“Places like Amazon can beat us on price for big-name products, so we are focused on local products and enhancing our perimeter offerings,” he says. “In the future, I see the footprint of grocers getting progressively smaller – with independents moving to smaller boxes and expanding on the fresh side.”