The traditional supermarket is undergoing a major overhaul as it changes in appearance, offerings and customer preferences. Part of the shift stems from the mounting pressure created by other channels such as dollar stores, big-box retailers, convenience stores and even drugstores that are jumping into the competitive market of food sales. Even online grocery delivery will make up around 10 percent of the marketshare by 2025.
The supermarket industry is not only evolving, it's physically growing. Supermarkets plan to add 290 million sq. ft. of retail space by 2025, according to a recent PwC food mergers and acquisitions analysis.
"2015 will probably be a turning point for grocery retail as we know it," said Thom Blischok, chief retail strategist at Strategy&, a unit of PwC.
So what will the future look like? Some supermarkets will be expanding banners to engage more consumers, while others will actually scale back and focus on specific, select consumer needs. As PwC articulates, it comes down to the survivalists versus the selectionists.
In the past, the goal for a grocery chain was to establish as many stores as possible and create a widespread presence. But today's grocers need to redesign the legacy model to fit the diverse needs of modern shoppers, "which will be more aligned to consumer demographics moving forward," said Leanne Sardiga, PwC's U.S. retail and consumer deals leader.
Blischok outlined two categories of the key grocery shopper demographics in the United States: the survivalists, who have low disposable income, and the selectionists, a group with more disposable income that searches out artisanal and specialty products. These two competing factions require supermarkets that will honor each of their specific needs—such as a large selection at reasonable prices on one hand, and specific, tailored offerings on the other.
"Smaller format" is a phrase that's being thrown around by many retailers as they look to save money on physical store space and pour more funds into their digital and omnichannel presence. But in the world of supermarkets, it seems to be quite the contrary for some traditional grocers. In fact, many chains have recently announced the introduction of larger format stores that offer everything from prepared foods to footwear—think Meijer teaming up with Skechers for shops-in-shops.
To accommodate the extra resources, some grocers are scaling up to larger formats. For example, Smart & Final recently announced that it would focus on building more Extra branded locations, the chain's larger format, complete with an additional 10,000 household products, including a broader perishables assortment, bulk foods and fresh seafood.
Many of these supermarkets are starting to mirror one-stop shopping destinations—big-box chains such as Walmart, Target and Costco—to meet the needs of busy consumers on a budget.
Growing the physical footprint is not necessarily the answer for all chains: unique offerings can also drive sales up.
"Fifty years ago it was, 'How many [supermarkets] can we build?' But in reality, today if we build it, if it's not unique, consumers are not showing up," Blischok said.
Meijer has had a stellar year for expansion. The supermarket chain is in the midst of an aggressive two-year plan to roll out new stores and has decided that fashion is a good way to boost traffic.
Argos is another prime example of a supermarket chain thinking outside of the box. The retailer recently announced it would open digital stores within 10 supermarkets. The 1,000- to 5,000-sq.-ft. spaces will sell non-grocery items, and shoppers will be given a choice of 20,000 products that can be bought instantly or reserved, with an additional 40,000 products available for home delivery.
Even Kroger (NYSE:KR) has been expanding in size, locations and offerings. Still looking to expand—and after 45 consecutive quarters of sales growth—the grocery chain announced that it would invest $100 million in its Michigan stores.
Expanding the grocery assortment is a key strategy for many supermarkets, and Retail chain Loblaw announced it would spend $1 billion to make over its stores by adding more locations and increasing assortment.
Traditional grocery assortments won't cut it in 2015. Both Aldi and Target (NYSE:TGT) recently announced they would be broadening their grocery assortments. In fact, Target's focus to improve grocery sales was outlined as an important initiative by CEO Brian Cornell earlier this year.
Even when it comes to food and beverage assortments, shoppers are looking to healthier organic and all natural options, thus competing with Whole Foods (NASDAQ:WFM) and Sprouts, who previously cornered the market.
Busy consumers want prepared food to grab on the go. In fact, several stores are making over the prepared food section to lure in more traffic. For example, PriceChopper recently announced it would rebrand 135 stores with the new Market 32 name, dubbed after its New York test location, Market Bistro, which includes food service offerings, a food court, an Italian market and a growler station for beer.
What will supermarkets look like moving forward? Those that will survive will have to be adaptive, Blischok said. As the demographics shift due to urbanization and as Boomers and millennials—both with very different shopping habits—look to fill their pantries (millennials pantries are 30 to 50 percent smaller than Boomers), stores will have to maintain a targeted focus and remain flexible to fit changing needs.
These are just the initial steps required to tackle the changing world of technology in retail. By 2025, the way food is even manufactured will change completely, which in turn will affect how and where it is sold.
Blischok believes that within a 20-year period grocery retailing will be completely different, and in fact, the reality is that consumers will probably be able to purchase anything anywhere in the world and have it delivered within 24 hours.