Supersized Supermarkets Go on a Diet.

Faced with dwindling sales and sagging market share, many supermarkets are making an about-face on store sizes.

Instead of trying to compete with superstores in terms of price by building supermarkets as large as two football fields, stores are downsizing, selling fewer products at higher prices.

The change in strategy, which many consider a major shift, results from the fact many large stores aren’t generating enough revenues to cover their cost of operations.

“The actual size of supermarkets is going down,” said Jerry Golub, vice president of perishables, at Price Chopper Supermarkets at the recent Food Marketing Institute (FMI) conference in Chicago. “To grow sales, they are going to have to find a way to distinguish themselves, and they’ll have to find a niche.”

According to the FMI, average weekly supermarket store sales were $348,130 in 2003, compared to $368,779 in 2001.

Meanwhile, variable expenses and overhead have increased. For instance, total employment costs as a percent of supermarket sales was 14.9 percent in 2003, compared to 13.3 percent in 1993, according to the FMI.

And while sales growth at the top ten supermarket chains grew 2.7 percent in 2003, overall food sales growth increased 5.8 percent during the same period.

Speakers at the FMI said supermarkets have reached the point where they can no longer gain economies of scale from physical expansion. Not only has the “one stop-shop” idea failed for some supermarkets, but consumer tastes have shifted and supermarkets have struggled to keep up.

The median average store size has increased from 32,400 square feet in 1992 to 44,000 square feet in 2003, according to the FMI. Some grocery stores have ballooned to 90,000 square feet.

Some of these supersized supermarkets are having problems breaking even; they are simply not using their space efficiently, says Mark Heckman, president of Strategic Retail Solutions in Bradenton, Fla. “Supermarkets can get it right by reducing their size,” he says.

“We’ll see stores shrink to about 40,000 to 50,000 square feet. Supermarkets are realizing they can’t compete on size and price and now they are trying to get cozy with customers.”

As supermarkets shrink, grocers will be more selective about what they place on shelves, forcing them to become better attuned to consumers’ demands. In theory, that should lead to lower overhead and higher sales.

Supermarkets should look to independent chains that have been successful at selling fewer products and generating more sales per store, says Herb Sorensen, president of Sorensen Associates. For example, the Stew Leonard’s chain doesn’t have a center aisle and stocks far fewer products than a traditional supermarket.

“No center aisles–there’s something there,” Sorensen says. “Leonard’s generates more sales per store than the average supermarket.” Sorensen says that if supermarket chains were to cut half of their stock, they could boost sales; supermarkets can have an average of 50,000 SKUs.

The center of the supermarket is fading away as a profit center, says Laurie Demeritt, president of The Hartman Group. Some supermarkets, such as Marsh Supermarkets, are removing the center aisles, placing perishables in the center and creating “food centers” on their stores’ periphery.

“I laugh when people ask me if I hired a consultant to do the design of our store,” says Stew Leonard Jr., CEO and president of Stew Leonard’s. “Our design is based on a farm image and so we visit a lot of farms. “We like that rustic look.”

Another supermarket that has implemented a similar design in some of its stores is H.E. Butt Grocery Co. (H.E.B.), Sorensen says. H.E.B created its Central Market stores, which averages 70,000 square feet per store. Like Stew Leonard’s, these stores have no center aisles. In their place are produce, meat and fish departments as well as a cooking school.

Texas-based H.E.B. has been successful at maintaining its market share in a state that has the nation’s largest number of Wal-Mart stores.

Part of its success has been due to H.E.B’s smaller size and customized stores, Sorensen says, as the chain knows “their customers like the back of their hand.”

By Kathleen Kiley, Managing Editor, Consumer Markets Insider
Courtesy of http://www.kpmg.com