Battling to Win in an Hourglass Economy

The marketplace for traditional grocers is under attack, and this battle is only likely to intensify in coming years. Safeway and Supervalu – two chains that heavily target the middle class – are struggling to grow as they continue to get hammered by increased competition for customers who are flocking to specialty and discount grocers. Fierce competition is only in part to blame; what is really setting in is a more permanent shift in consumer spending. The new normal looks more like an hourglass, with expanding markets for affluent and value-seeking consumers and a shrinking middle class with a shrinking budget for food. With wallets tightening and competitive pressures intensifying, how can you gain a stronger foothold with growing consumer markets at either end of the hourglass?

Re-draw the Battlefield

Regardless of where your brand sits on the hourglass, it’s time for a fresh analysis with this new dynamic in mind. Map out the markets you serve relative to your various consumer segments: high-value; value-conscious; and everyday staple shoppers. Next, plot out local geographic competitors against these segments and their respective market shares with each group. Find the white space – where can you take a bigger slice of the pie? Are there geographies where a proactive expansion strategy can help secure your competitive position?

Food retailers with significant market growth are those that are playing to the ends of the hourglass, such as Whole Foods, Trader Joe’s, and Dollar General. Gaining a competitive advantage will require a robust strategy to meet the needs for each target consumer group.

Reinforce the Perimeter

Consider how you can entrench your competitive positioning with each core customer group, and tweak your services, look and/or approach to adjust. Innovative food retailers are redefining the traditional grocery store design, creating stores with minimal center aisle space and enlarged perimeters. Others, like Giant Eagle, are developing smaller-format stores with new offerings like drive-thru pharmacies, eat-in cafés and Wi-Fi access.

Customers are looking for more of an experience from food retailers. For example, Mariano’s, part of Roundy’s, is a rapidly growing specialty chain in Chicago that offers different stations (e.g., wine and coffee bar, gelato café, classroom kitchen, etc.). Many grocers are staking a claim around ready-to-eat options to better compete with the quick service restaurants. These new models are re-shaping customer expectations about a trip to the grocery store.

Forge New Alliances

Food manufacturers, foodservice operators and other logistics partners can help to strategically differentiate your brand with growing customer segments on the hourglass. WalMart continues to push this thinking by enlisting foodservice operators like Pizza Hut and Subway to set up restaurants within their stores and by experimenting with a monthly delivery service of high-end foods.

Food manufacturers can also provide innovative ideas to address changing customer needs, particularly with regard to pricing or quality. ConAgra’s recent acquisition of Ralcorp will allow them to better meet the needs of retailers by providing a multi-tiered private label and branded offering for all consumers.

Winning in an hourglass economy will require traditional grocers to think, act and work differently. Re-drawing the battlefield, reinforcing the perimeter and forging new alliances will be critical for survival.

Manny Picciola is a Vice President in L.E.K. Consulting’s Chicago office and a leader in the firm’s Food & Beverage practice.