Limited-Assortment Grocery Store Format: The Second Time Around

The BenefitIt's clear that the lifecycle of store formats is much shorter than it used to be. This means that retailers must work even harder to continually enhance the value of their offers to consumers. This Competitive Edge looks at limited-assortment grocery stores, i.e., a store format that is enjoying strong growth even in these difficult economic times, and what this development means for retailers and manufacturers.In 1976, a new type of grocery store opened in a Chicago suburb. This 10,000 square-foot Aldi offered customers fewer than 1,000 items, most of which were "own" brand. What was unique at Aldi was the focus on efficient assortment, i.e., there was only one brand and one size product in most categories.The initial reaction of the grocery community was amusement. Who would shop in a store like this?In less than one year, however, attitudes changed. Many retailers weren't sure how to compete with this powerful new store format.Over the next couple of years, many companies tried to copy the limited-assortment grocery store format. In fact, by 1980 there were 750 limited-assortment grocery stores in the U.S. Soon, other supermarkets found that they could neutralize the price appeal of the limited-assortment grocery store by using a focused, low-priced generic offering.As a result, by 1983, the explosive growth of limited-assortment stores had stopped and there were fewer than 400 left in the U.S. While the format had more durability in Canada, only two operations, i.e., Aldi and Save-A-Lot, remain significant limited-assortment grocery store players in the U.S. today.What we had witnessed in the period from 1976 to 1983 was the shortest lifecycle of a retail food store format in recorded history.Fast-forward to 2003, where the limited-assortment store format is enjoying a Renaissance with nearly 2000 outlets and strong growth. This issue of Competitive Edge describes the shopping experience offered by today's leading limited-assortment grocery store operators, and looks at the implications for both supermarket retailers and consumer packaged goods manufacturers.Touring Today's Limited-Assortment StoresIf you haven't been in a limited-assortment store recently, it's worth the trip. We visited both an Aldi and a Sav-a-Lot in the Chicago market this month to get a feel for the store layouts, product offerings, and overall shopping experience of today's limited-assortment store format. The efficient store designs and attractive product packaging are very impressive. Equally impressive are the prices and number of leading brand name products that have found their way onto these stores' shelves. Our first stop is Aldi. There are several features that make this limited-assortment store worth a visit. While the store is set up like a warehouse with dark floors and pallets serving as shelves in many cases, two features make this store easy to shop:Fixtures are only about five feet high, so the entire store is visible when walking down each aisle.Product signs and prices are easy to read.Approximately 90 percent of the products are private/custom brands, but many of the packages are new. They're clear and colorful and project a high-quality image.Many packages and labels rival those of the major brands. For example, Grandessa ice cream, Sea Queen frozen seafood, and Clarissa facial tissues--all Aldi brands--have outstanding, high-quality packages.Every single private brand product has a quality guarantee on the label, offering a full refund if the consumer is not completely satisfied--a guarantee that most major branded products do not offer! All of the products we sampled lived up to the image, too--they were very good.The candy and seasonal categories are well developed offering a wide variety of products including a strong presence of national brands.The perishable offerings have expanded to include a number of pre-packaged fruits and vegetables, poultry, and even U.S.D.A. Choice beef. Our second stop is Save-A-Lot. While Save-A-Lot's format is the same, it feels a little different from Aldi. It resembles a conventional, full-service grocery store with bulk produce and perishable offerings and many category-leading brand name products. Once inside, Supervalu's influence is immediately evident. Here are some of the attributes that give Save-A-Lot the feel of a supermarket: Similar to Cub Foods, Save-A-Lot has a 'Wall of Values" each shopper passes entering the store, featuring 10-15 items, the majority of which are branded products, at great price points.The perimeter of the store is all perishables, featuring bulk produce and an impressive variety of pre-packaged poultry, seafood, and beef.The store environment also resembles a conventional supermarket, with strong lighting, white walls and floors, high shelves, and wide aisles.In addition to the store layout and design, the product selection and merchandising also make this store seem like it offers more than just a limited-assortment.Approximately 85% of the items are private/custom brands, but major branded products are spread throughout the store in each aisle and on every endcap. The result is the perception that there are a lot of major brands to choose from across many categories. The space around the registers is also used to display major branded products. Each checkout lane has three or four leading items on deal that customers can select while waiting in line.The weekly ad is available upon entering the store, and items featured in the ad are prominently displayed throughout the store. Product merchandising, a conventional grocery store ambiance, and an efficient assortment of perishables with outstanding prices combines to make this store a great alternative to the larger, full-service supermarket. Limited-Assortment Stores: A True Price LeaderThe ApproachThe publishers of this report compared prices on a market basket of 69 items at two limited-assortment stores (Aldi and Save-A-Lot) to prices of 69 similar items at a leading full-service supermarket in the Chicago area.Each item in the market basket was the store's best value (lowest price per unit) in a pre-determined popular size within a selected category or sub-category. While the majority of items were private label or store brand products, a few national brand items met the best value criteria and were included.This "similar item" market basket clearly reflects each chain's offering to the price-conscious shopper.Total Store PricingLooking at a market basket of 69 "similar" items, the limited-assortment store format is a clear price leader over the full-service supermarket.Overall, the limited assortment stores hold a price advantage of approximately 30% over the full-service supermarket. Additionally, this price gap has remained constant over the past decade. In a similar 1991 analysis, WBC found that limited-assortment stores offered a 29% price advantage over supermarkets. (See Chart 1)Departmental PricingThe limited-assortment stores maintain a significant price advantage over the supermarket in several retail food store departments.The limited-assortment stores hold the greatest price advantage over supermarkets in grocery (their traditional area of focus) and perishables (an emerging strength). Supermarkets appear to do their best job of narrowing the price gap versus limited- assortment stores in frozen foods and HBC. (See Chart 2)Category PricingAldi maintains a price advantage over the supermarket in 33 of 37 categories analyzed, while Save-A-Lot holds an advantage in 35 of the 37 categories. (See Chart 3)Item PricingThe limited-assortment stores maintain a price advantage over the target supermarket on approximately 90% of all comparable items. In fact, a few items are over a dollar less at limited-assortment stores. (See Chart 4)Consumer Trade-OffsLimited-assortment stores present outstanding values assuming that consumers are willing to make a few key trade-offs.Private brands - Consumers must be willing to purchase private/custom brands not available in other stores. The limited-assortment stores are, however, making an attempt to improve the quality image on these private brand products. This is particularly evident in Aldi with new, exciting packaging on certain items and a satisfaction guarantee on all their own brand items. Assortment - Consumers typically cannot do all their weekly grocery shopping at a limited-assortment store but even this is changing. Limited-assortment stores are now offering more perishable items than they have in the past, allowing consumers to fulfill the majority of their weekly grocery needs in these stores.ImplicationsLimited-assortment grocery stores are growing rapidly and are continuing to strengthen their value proposition for consumers. If that were not enough, we anticipate that another large, international limited-assortment grocery store operator could be entering the United States in 2003. So, it makes sense to keep up to date on these extreme-price-appeal formats.Two key characteristics of these stores that will have strategic implications for others in the grocery business.A Dominant Price Offer - Our price checks show the strength of limited-assortment grocery stores versus traditional supermarkets, and other work we've done shows that their prices are generally the best in the market, i.e., superior to all other competitors, including clubs and supercenters.These strong prices are driven by two central themes in the format's business model.--"Own" label products with specifications that match the quality of leading brands. --Exceptionally high sales per SKU that drive dramatic efficiency at all levels of the supply chain.Since it will not be easy for other retail formats to duplicate the selling efficiency, the only way they can match prices will be to subsidize them; a risky strategy in this hyper-competitive market.This suggests:--Retailers will want to look for opportunities to more aggressively apply the same efficiency drivers, i.e., high quality, "own" label, and high sales per SKU, to build more effective assortments.--Manufacturers will want to help retailers see where their own brands already generate high sales per SKU and then take steps to ensure that these fast-moving items contribute to strong financial performance for both the retailer and themselves.A Broadening Customer Appeal - Limited-assortment grocery stores originally targeted consumers who needed/wanted to save money on groceries.Aldi is building stores that are respectable, if not appealing, and now offers products that "look and taste as good" as anything available in the market.Save-A-Lot stores are neat and complete and increasingly will be combined with the value of a dollar store. Some are calling this new format a high-value combination store.Looking to Canada, limited-assortment grocery store principles are now being applied in even larger stores, e.g., Loblaws, No-Frills, with good results.Retailers will want to:--Consider limited-assortment grocery stores as more serious competition for the "center-of-the-store" business and make the necessary adjustments to reduce their vulnerabilities.--Evaluate where the limited-assortment grocery stores can fit into their evolving offers to consumers, e.g., as a standalone concept or perhaps as a store within the store to complement a strong perishables offering.Manufacturers with a focus on "center-of-the-store" categories will want to decide whether they want to be active in this format and if so, how to do it. In our experience, answering the second question can be a lot harder than the first.

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