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    Expert Column: In Grocery, Premium’s the New Mass Market

    Growing niche increases retail competition

    By Alex Evans and Manny Picciola, L.E.K. Consulting

    Many understand that the playbook for growth within the food industry has always been to identify and capitalize on promising consumer trends. It requires a precise method to navigate through the nuances in each category to find the emerging "gold rush." Success stories like Greek yogurt booming when the overall yogurt market is flat, or gluten-free baked goods rising while bakeries aren't growing, are prime examples of this.

    We're seeing a similar phenomenon in the grocery channel. Although grocery is flat overall, the "premium grocery" channel is expanding by approximately 15 percent per year, with strong growth expected to continue.

    Playing to the top end of the hour-glass economy, premium retailers like Whole Foods Market and The Fresh Market are providing a unique shopping experience that consumers love. Grocery shopping in these establishments is an experience. Between the live piano players, wine-tasting areas, sushi bars, grilling stations and expresso bars, it feels more like a stroll through a cruise ship than a grocery store. Meanwhile, shoppers can pick up their favorite organic produce, grass-fed beef or GMO-free packaged goods while they're at it. And some of these retailers carry the mainstream brands consumers love but thought they could find only in a traditional grocery store.

    What is the Premium Market?

    To be clear, there's no formal definition of the premium grocery channel. It's not a food, drug, mass merchandiser or convenience store (FDMC) channel that can be pulled from Nielsen or Information Resources Inc. It is, however, a very real segment that's worth tracking. We've gathered publicly available data from four premium grocery retailers (Whole Foods, Natural Grocers, Sprouts and The Fresh Market) that in aggregate have grown at 14 percent and 16 percent annually in terms of outlets and revenue, respectively, since 2009. These four retailers are all dwarfed in size by industry behemoths like Walmart or Kroger, but a $20 billion retail segment growing at 15 percent per annum is nothing to ignore.

    These premium grocers have revealed expansion plans to add around 400 to 1,000 outlets each. To put this into perspective, 68 of the top 75 grocers in the United States have fewer than 1,000 outlets, according to "2014 What’s in Store." What's more, the premium grocery channel goes well beyond the examples cited above. There's a long list of others, including Fairway Market, Earth Fare, Mrs. Green's, Kings, Gelson's, Lund's, Bristol Farms, Plum Market, Kowalski's, Dean & Deluca, Straub's, Roche Brothers, Nugget and New Leaf, to name just a few.

    One of our favorite examples is Mariano's, a premium concept based in Chicago and developed by Roundy's, a Milwaukee-based retail grocery company. In short, Mariano's has taken the market by storm –- and is premium grocery at its finest. The company doubled its outlets in 2013-14, growing from 13 stores to 30 by building six new stores and acquiring 11 closed Dominick's locations. Mariano's eventually plans to have 50 outlets in the Chicagoland area, which is noteworthy considering Chicago's leading grocer in 2010 was Jewel, with 36 locations, followed by Aldi, with 37, and Dominick's, with 16, as reported by local TV station WBEZ. We're not talking about a small footprint here, either -– each store averages about $50 million per outlet per year, according to the Chicago Tribune.


    The premium grocery channel has grown quickly from an interesting niche to a strong growth engine for the food industry. Although leading retailers in the channel are small compared with leading grocery stores, their growth trajectory warrants increased attention from a number of market participants:

    • Premium grocery retailers must prepare for a more crowded market (e.g., Sprouts expanding into markets outside of the Southwest, Whole Foods infilling the eastern United States, etc. ); continue to focus on differentiation from competitors; and increase customer loyalty.
    • Traditional grocery retailers will need to step up their game as premium players become more pervasive and likely more price-competitive; specifically, traditional players will need to increase their focus on customer segmentation and capital allocation, while recognizing that their "me too" premium/natural aisles will no longer be sufficient.
    • Food and nutraceutical brands need to include premium grocery retailers as a key segment of their growth strategy and differentiate their offerings in both premium and traditional segments; however, the same strategy that worked with traditional retailers (e.g., heavy promotion/BOGO) may be less effective with premium players.
    By Alex Evans and Manny Picciola, L.E.K. Consulting
    • About Alex Evans and Manny Picciola Alex Evans and Manny Picciola are managing directors and partners at global management consulting firm L.E.K. Consulting. To learn more, visit www.lek.com.

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