-By Mandy Putnam

In the original Karate Kid, Mr. Miyagi's words of wisdom to Daniel about focus and commitment are equally applicable to middle-of-the-road grocers in today's economy:

Walk on road.
Walk right side, safe. Walk left side, safe.
Walk middle, sooner or later, you get squished just like grape.


Tough financial times are changing the retail landscape as shopper patronage shifts toward cheaper alternatives. Grocery shoppers are becoming more cost-conscious, and this is driving a change in the demographics of "who shops where."

And those grocers who remain in the middle of the road, without a compelling reason for consumers to visit their stores, may soon face the fate of Mr. Miyagi's grape.

Not surprisingly, lower-income shoppers are moving to lower-cost channels. Concurrently, some of these channels are gaining more customers on the high end, as new patrons trade down from more costly retailers. Natural and organic food stores and gourmet grocers are facing some of this defection of their lower-income customers.

Indeed, according to a study conducted last spring, and which PG will publish in an exclusive series, TNS' Shopper Journey Study, one-fifth of shoppers reported altering their grocery shopping behavior due to the economic conditions at that time. If economic pressures continue, it's likely these changes could foreshadow a continuing increase in shopper polarization at grocery stores, based on price positioning.

Cheap trumps broad

The study found that shoppers switched to retailers that offer deep discounts—such as dollar stores and extreme-value—if they couldn't fulfill their total grocery shopping lists at those retailers (Fig. 1).


 Fig. 1. Store formats/retailers shopped more often, about the same, or less often compared with a year ago, for grocery shopping*               

	Shopping more often compared with a year ago	Shopping about the same compared with a year ago	Shopping less often compared with a year ago	Do not shop this type of store
Dollar store (e.g., Dollar General, Family Dollar, Dollar Tree, 99¢ Only, Big Lots, etc.)	31%	30%	19%	20%
Extreme-value supermarket (e.g., Save-A-Lot, Aldi, Cub Food, Food 4 Less, SaveRite)	24	16	13	47
Walmart Supercenter (contains a full supermarket)	23	27	23	27
Membership warehouse club (e.g., Costco, Sam’s Club, BJ’s)	12	21	22	45
Conventional supermarket (e.g., Albertsons, Kroger, Safeway)	11	36	34	19
SuperTarget (contains a full supermarket)	5	18	21	56
Specialty food store/neighborhood specialty market (e.g., Trader Joe’s, The Fresh Market, etc.)	4	11	26	5
Health/natural food supermarket (e.g., Whole Foods, Wild Oats)	4	10	26	60
Convenience store for in-store merchandise purchase	2	17	34	48
*Among shoppers who have changed the stores they shop, due to economic conditions Source: TNS Retail Forward ShopperScape™, May 2008

Retailers such as Wal-Mart managed to hold their own among shoppers, even as some of their poorest customers traded down to deep discounters, because these customers were replaced with shoppers migrating from other retailers higher up the price chain.

At the same time, higher-priced food retailers, such as specialty and natural/organic food stores and convenience stores, struggled to retain their customer bases.

What shoppers said they were going to do in the spring of 2008 is reflected in shopping patterns tracked since then. Year-to-year comparisons of shoppers patronizing certain channels show more shoppers turning to extreme-value grocers, such as limited-assortment players ALDI and Save-A-Lot, and cut-price warehouse grocers such as Cub Foods and Food 4 Less. Fewer shoppers are making inside merchandise purchases at convenience stores.

Despite the shifts, conventional supermarkets and supercenters are still shopped by the majority of primary shoppers in households. And the percentages of shoppers patronizing those lines of trade have remained fairly static year-to-year.

Even the most bargain-oriented shoppers continue to turn to conventional supermarkets and supercenters because few shoppers can fulfill their entire grocery lists at limited-assortment and dollar store alternatives such as ALDI or Dollar General.

While this cross-channel shopping exposes consumers to alternatives and allows for the possibility of customer base erosion, it can also reflect a symbiotic relationship between channels.

Cross-shopping among grocery channels is frequent, with some channels more likely to share customers than others (Fig. 2). Typically, about nine out of 10 shoppers who frequent other grocery channels during a four-week time period also patronize conventional grocery retailers.


 Fig. 2. Cross-shopping among food retail channels is frequent, with some channels more likely to share customers than others*

	Conventional supermarkets	Supercenters	Warehouse clubs	Extreme- value grocers	C-stores (non-gasoline purchasers)	Health/ natural supermarkets
Sample size	10,470	6,760	4,672	2,492	2,217	1,900
Conventional supermarkets	100%	84%	90%	88%	91%	93%
Supercenters	54*	100	57	60	63	48
Warehouse clubs	40	39	100	46	38	54
Extreme-value grocery retailers	21	22	25	100	30	29
C-stores (non-gasoline)	19	21	17	26	100	22
Health/natural supermarkets	17	13	22	22	19	100
*Read as: 54% of conventional supermarket shoppers also patronized supercenters within a past four-week time frame. Source: TNS Retail Forward ShopperScape™, May 2008

Least likely to cross-shop conventional grocers are supercenter customers (84 percent). Conventional supermarket and supercenter shoppers are less likely to cross-shop alternative grocery channels than patrons of extreme-value grocers, convenience stores, and natural/organic supermarkets—channels with generally more limited assortments.

In some cases, cross-shopping appears to be limited due to income and other demographic differences. For example, supercenter shoppers don't often visit natural/organic supermarkets, while warehouse club customers are unlikely to shop for merchandise inside convenience stores.

In other cases, the shopper often benefits from an informal symbiotic relationship between lines of trade. These relationships seem to develop based on the same shopper cross-shopping two different retailers, where (1) one retailer offers a limited assortment of goods but at highly discounted prices, and (2) another retailer offers a wide assortment of goods at less discounted prices. For example, extreme-value grocery store customers are also likely to shop supercenters—what you can't buy at ALDI, you can find at a Wal-Mart Supercenter.

Natural/organic supermarkets and warehouse clubs also often share customers. Upscale shoppers rationalize spending more on organic and natural products if they fill their pantries affordably by buying some goods in bulk.

The retailer with the most to lose from this practice of cross-shopping is the grocer positioned in the middle of the pack, without a relevant differential advantage. Shoppers in tough times have more incentive to overcome their inertia and explore alternative options to the nearby me-too grocer.

An analysis of retail channels shows that the conventional supermarket shopper profile is the only one remaining static as other grocery channels' profiles shift. Eighty-five percent of consumers surveyed said they shopped at a conventional grocery store during a four-week time period; the profile of the conventional supermarket shopper closely reflects the total primary shopper population, and it hasn't changed significantly since last year (Fig. 3).


Fig. 3.  Demographics of primary shoppers shopping grocery channels during the past four weeks

		Total primary shoppers	Conventional supermarkets	Supercenters	Warehouse clubs	Extreme-value grocers	C-store (non-gasoline)	Health /naturel supermarkets
	Sample size	12,296	10,470	6,760	4,672	2,492	2,217	1,900
Age	18-24	6%	94	103	89	87	136	104
	25-34	18	99	101	100	99	117	126
	35-44	20	98	100	101	106	115	105
	45-54	21	101	99	95	102	113	92
	55-64	16	103	103	103	92	85	92
	65+	19	101	97	105	102	55	84
Income	$25K	25	96	107	63	125	98	74
	$25K-$49.9K	26	100	105	89	108	104	88
	$50K - $74.9K	18	102	103	107	97	103	95
	$75K - $99.9K	11	102	93	128	77	98	117
	$100K+	19	104	85	140	73	97	146
Market size	Non- MSA/MSA 500K	28	94	133	79	110	115	56
	MSA 500K-1,999K	22	101	119	93	90	100	88
	MSA 2M	50	103	73	115	99	92	131
Household size	1-2 members	60	100	97	92	94	92	101
	3+ members	40	100	104	112	109	111	98
Source: TNS Retail Forward ShopperScape™, May 2008

Aside from conventional supermarket and supercenter shoppers, however, demographic profile differences among customer bases have become more pronounced since 2007, according to TNS data:

The profile of warehouse club shoppers—who are more likely to be upscale and urban, and have larger-sized households—has shifted further upscale year-to-year. Extreme-value grocery store shoppers, who are also more likely to have large families, skew downscale and small market. This group's demographics have moved toward larger households and away from older shoppers, who typically reside in smaller households. Convenience store shoppers are typically young, rural shoppers with larger families, and this group's profile has shifted even younger. Natural/organic supermarket shoppers are concentrated in the 25-to-34-year-old age segment, in the most affluent ($100k+) households, and in metro areas. Income and metro size are stronger determinants of this group this year. Many channels' shopper profiles have shifted toward greater concentrations of core customer demographics, which may reflect the success of customer retention programs, the erosion of fringe customer bases, or both. An exception is extreme-value grocers, which are seeing their shopper demographics shifting more toward families trying to mitigate the impact of food inflation on their wallets.

The impact of these changes could be greater polarization of grocery channels, with continued shakeout of the middle me-too players.
 
So, as Mr. Miyagi might have said:

Develop your point of differentiation.
Walk right low-price side, safe. Walk left on upscale/gourmet side, safe.
Walk middle, sooner or later, you get squished just like grape.

Mandy Putnam is v.p. of TNS Retail Forward, a global consultancy on shopper insights. She can be reached at mandy.putnam@tns-global.com.