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Grocery Polarization: Why The Middle is Disappearing

The grocery industry is flying high—and low. With shifting demographics and changing consumer behavior, grocers at either end of the spectrum are thriving. That leaves the middle players, well, stuck in the middle.

But there’s a way to gain a competitive edge, and it doesn’t involve trying to beat the big guys on price or the little guys on premium products.

Trading Down and Up

First, the research. In its May 2013 report, The Rise of the Hybrid Consumer, Rabobank notes that consumers are trading down on staples and trading up to high-end products, from premium brands in supermarkets to fine dining. That means food retailers will become increasingly polarized into value and premium, with middle ground players struggling to retain market share, according to the report.

Hybrid consumer patterns are reflected in the growth rates of U.S. retailers, according to Rabobank. “Those geared towards the mid-market are showing lower growth rates over a longer period than their peers at the extreme ends of the spectrum. Between 2007 and 2012, above-average performers in the U.S. were either hard discounters, such as Aldi, or premium formats such as Whole Foods and HE Butt Grocery.”

The importance of “footprint” locations has become a big part of conversation when it comes to adapting to consumers trends. Most mainstream grocers have established large locations in populated suburban areas and are now zeroing in on high transit urban opportunities.

A Flurry of Acquisitions

Further impacting mid-market grocers is the emergence of mass-retailing powerhouses. To compete with rivals Walmart and Target, large grocery chains are buying up smaller grocery retailers and pharmacies, giving them even more dominance in the market.

Following on the heels of Target’s entry into Canada, Sobeys Inc. signed an agreement to buy Safeway Canada for $5.8 billion in June. A month later, Loblaw Companies Ltd., the country’s top grocer, announced its $12.4 billion acquisition of Shoppers Drug Mart—said to be the largest takeover ever of a Canadian retailer. And on Aug. 14, Montreal-based Metro Inc. said it will restructure its Ontario operations and become the exclusive operator of Target’s pharmacies in Quebec.

The U.S. grocery giant, Kroger, purchased Harris Teeter in July for $2.5 billion. Harris Teeter is known for its upscale fresh foods and produce. This acquisition gives mass grocer Kroger access to a growing niche market.

Most recently, Albertson LLC purchased United Supermarkets, which has a concentration of stores in the Dallas Fort Worth Area. This acquisition gives Albertson 50 stores, three distribution centers and 26 fuel centers.

Tech Tools

So where does all this leave the “middle” guy? Competing on price alone is a losing battle: Walmart wins the price war most of the time. Going upscale requires a huge capital investment and runs the risk of alienating current customers, while facing the challenge of trying to attract new ones. A smart strategy for small- and mid-market grocers is to differentiate and add value to consumers through technology. There are a number of digital tools and platforms that can do so:

eCommerce: With their hectic lifestyles, consumers are increasingly embracing online shopping, and that includes grocery. eCommerce grocery sales are expected to rise to $32 billion by 2015, according to Nielsen. Online shopping is a huge convenience for consumers, who can shop on their computers or mobile devices at any time, and avoid waiting in lines. In a webinar on online grocery shopping, Nielsen stated that consumers love online grocery shopping, but it takes time getting used to. “You can simplify the process by improving the online experience with navigation, search, online help and porting over shopping lists. Deliver a better time-saving experience and consumers will hang on.”

Digital Coupons: Coupons are going paperless, as retailers can offer more personalized savings digitally. By linking to a customer’s loyalty account, targeted coupons can be delivered right to their inbox or mobile device. In a survey by Booz & Co. and Food Marketing Institute, 52% of consumers said they use technology in their grocery shopping, with 32% using online coupons. Although digital coupons only represent less than 1% of coupons distributed in the U.S., they have sustained “double-digital growth through expanded utilization by marketers, retailer integration that leverages their relationships with loyalty program shoppers, and growing consumer adoption of new savings opportunities,” according to the most recent CPG Coupon Industry Facts by NCH Marketing, a Valassis company. In the first half of 2013, digital coupons reached a 6.1% redemption rate for print-at-home coupons and 2.5% for paperless formats, while redemption of paper coupons declined 8.1%.

Planning Tools: Consumers begin their shopping journey long before they load up their shopping carts. They go online to research products, compare prices, search for recipes and look for deals. According to Nielsen, 38% of U.S. grocery shoppers spend at least 50% of their planning time online, while 18% spend at least 75% of their planning time online. In addition, 80% of digital planners check store circulars online and 22% preload coupons onto their phones. Grocer retailers can meet shoppers’ needs with digital planning tools such as personalized shopping lists, customizable flyers, recipe tools and menu planners. These tools can deepen customer loyalty and drive basket size, while offering time and money savings to consumers.

Reaching the Top

It may be a high/low retail world, but as consumers increasingly rely on technology in their daily lives, mid-tier grocers can stake their claim. Digital solutions will answer consumers’ call for convenience, simplicity and efficiency when it comes to grocery shopping. For retailers, offering personalization and a more engaging shopping experience through technology is a winning formula.

Articles and resources by the Mercatus team to help guide you on your eCommerce journey.

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