Honorable Mention, Outstanding Choices Article Award, 2011Food Retailing, Food Trends, Food Consumers, Grocery Purchasing, Agribusiness, Food Consumption/Nutrition/Food Safety, Marketing, L1, M1, L2, L8,

Seltzer, Jonathan M.

Senauer, Benjamin

English

Research Papers in Economics

  
 
 
4th Quarter 2010 | 25(4)  
THE CHANGING FACE OF FOOD RETAILING 
Ben Senauer and Jon Seltzer 
JEL Classifications: L1, M1, L2, L8 
Keywords: Food Retailing, Food Trends, Food Consumers, Grocery Purchasing 
This article explores current and possible future trends in the food retail value chain, particularly in relation to 
Michael Porter’s five forces, plus the impact of technology and another major driver of change, the most 
severe economic downturn since the Great Depression. (Porter, 1979) 
The rapid spread of supercenters and deep-discount food retailers illustrates Porter’s threat of the entry of 
new competitors, after supermarkets had been the predominant food retail format for several decades. The 
growth of private-label products reflects both Porter’s risk of substitute goods and the power of product 
buyers. In terms of technology, the analysis of the point-of-sale (POS) data generated by checkout scanners 
and barcodes has helped shift bargaining power from the product suppliers to the increasingly-concentrated 
retailers. The next major technological innovations may be the use of radio frequency identification, with 
substantial effects on the food retail value chain, and mobile-marketing coupon distribution through cellular 
phones. Finally, the deep recession caused households to economize on their food spending, which may 
have longer term impacts on consumer food purchasing behavior. 
New Food Retail Formats 
Porter’s threat of the entry of new competitors is well illustrated by the rapid growth of supercenters—big-box 
stores such as Walmart, Target, and Costco that sell both general merchandise and a full-line of the most 
popular food products. Costco is actually a wholesale club store and shoppers must be members as is the 
case with Sam’s Club, owned by Walmart, but the club stores compete in many respects with supercenters 
and conventional retailers. In addition, deep-discount, limited assortment food retailers selling less than 2,000 
items, such as Aldi and SUPERVALU’s Save-A-Lot, have grown rapidly. Aldi is one of the largest German 
food retailers and by early 2010 had 1,084 stores in 31 U.S. states (Bustillo and Martin, 2010). The 
expansion of Aldi’s U.S. operations and its sales have clearly benefited as households looked to save on 
their food purchases. 
These new formats have increased the competitive rivalry/pressure on traditional supermarkets. Virtually all 
the new Walmart stores opened in the last several years have been supercenters and a number of older 
stores have been remodeled and enlarged into supercenters. Walmart is now the largest U.S. food retailer 
and groceries accounted for 51% of its total store sales in 2009 (The Packer, 2010). Target, considered more 
upscale than Walmart, has been opening most of its new outlets as Super Targets, with a full grocery 
operation on one side of the store, while also remodeling older stores. 
Supercenters have a different objective for their grocery operations than traditional supermarkets, whose 
ultimate objective is the profitability of their food operations. For Walmart and Target supercenters, the goal is 
overall store sales and profitability; food is often used to raise customer traffic and the spillover of shoppers 
to the general merchandise side of the store, increasing the sales of higher profit margin categories. Food 
more than general merchandise is particularly useful for driving up the frequency of shopper visits. Therefore, 
supercenters are willing to accept lower margins on food sales than traditional supermarkets, according to 
food-retailing executives. In addition, most supercenters operate with far fewer distinct product items, called stock keeping units (SKU’s). Walmart, in particular, usually has the lowest prices in most market areas, with 
the exception of the deep-discount stores. 
Both Walmart and Target supercenters have greatly improved their grocery operations since they first 
started, especially in the fresh produce section. Target has used its own distribution system for dry groceries, 
but has sourced its fresh produce through SUPERVALU, the largest U.S. food wholesaler/distributor. 
Walmart at first depended on other firms to source and transport products to its distribution centers. For 
example, Walmart relied on C.H. Robertson and others to buy from the growers in California and elsewhere, 
and deliver to Walmart distribution centers a large share of its fresh produce. Walmart has since changed its 
whole approach and is now doing more of its own sourcing and distribution, with the goal of driving costs out 
of the system, which has always been a key competitive advantage (Birchall, 2010). Walmart now has its 
own produce buyers in the major growing regions, such as California and Florida. 
The growth of supercenters has brought a wave of consolidation to the retail food industry. Many small, 
frequently family-owned operators of one to several stores have lost the most sales to the new formats and 
gone out of business or been taken over by larger chains. This trend is likely to continue into the foreseeable 
future. In addition, large traditional supermarket chains, such as Kroger and Safeway, may increasingly suffer 
from the intensity of the competitive rivalry from these new formats. Interestingly, Walmart has announced 
that much of its future expansion will focus on smaller urban stores, rather than big-box, suburban 
supercenters (Bustillo and Martin, 2010). 
The Growth of Private-Label Products 
An excellent example of two of Porter’s forces, the risk of substitute products and the power of product 
buyers, is the rapid growth of private-label goods—also referred to as store brand or own brand—by 
supermarkets and other food retail formats. Grocery private-label sales grew by 9% in 2009 (The Economist, 
2009). In 2008, 97.5% of food retailers indicated they were offering private label/store brands as a key part of 
their merchandising strategy. The private label share of total sales increased from 16.5% among U.S food 
retailers in 2006 to 18.2% in 2008 (The Food Institute, 2009). Private label accounted for 35% of Kroger’s 
sales, the highest share of any major U.S. supermarket chain. Most food retailers have substantial room to 
continue to grow their private-label offerings, when compared to Germany where they account for almost 
40% of sales (The Economist, 2009). 
The deep-discounters, Aldi and Save-A-Lot, offer around 95% and 80% private-label products, respectively 
(Bustillo and Martin, 2010). Trader Joe’s, a unique U.S. grocery format focused on value-priced upscale 
products, enjoys very strong customer loyalty and has been expanding rapidly even in the recession. Trader 
Joe’s, which is privately owned by the same German family as Aldi, relies extensively on its own store-brand 
products. 
Private-label products typically cost consumers about 25% less than the national brands, such as Kraft, 
Kellogg and General Mills. Moreover, the quality of private-label goods has greatly improved and many 
consumers may never go back to the national brands, even when the economy fully recovers. Most 
supermarkets still stock the top national brands in a category, such as Kellogg and General Mills in breakfast 
cereal, but the brands that are not in the top one or two in terms of market share may have vanished from the 
shelves. Even for top national brands, stores may have cut back on the number of package sizes offered and 
facings to make room for more private-label items 
In most stores, including Walmart and Target supercenters, private label is stocked close to the major brand, 
so customers can easily compare the cost savings. On a visit by one of the authors to the Walmart 
Supercenter in Stillwater, Minn., their store-brand, “Great Value” Frosted Flakes, selling for $2.50 for 23 
ounces, was right next to Kellogg’s Frosted Flakes at $2.98 for the same 23 ounces (prices for November 12, 
2010). A 2-liter bottle of “Sam’s” Zero Coke was 78 cents compared to Coca Cola’s Coke Zero for $1.48. 
Interestingly, “Sam’s” soft drinks were shelved at the far end of the aisle in a very small area with Pepsi and 
Coca Cola products dominating the section, which might suggest some type of compensation for shelf 
placement, referred to as a “slotting allowance”, or just the power of the national brands. 
Many retailers are using a two tier private-label approach, one price-oriented and the other more quality-
focused. Super Target is a good example, with its lower-priced “Market Pantry” products, while “Archer 
Farms”, its other store brand is meant to denote quality. Store brands are attractive to retailers because their profit margins are typically higher than on national brands. With their analysis of POS data, retailers are 
better positioned to forecast product sales and match production and inventory of private-label products to 
final customer demand than are manufacturers of national brands. Another reason for the rapid growth of 
store brands is that “retailers have masterfully shifted the consumer consciousness from generic to private 
label” according to Karl Halpert, CEO of Private Label Select (The Food Institute, 2009, p. 87). Many 
consumers now think of private label as representing the best value—quality at a lower price. 
Most retailers do not manufacture their private-label products, but contract with a food processor for 
manufacturing. In a number of cases the store brands are actually manufactured by the national-brand 
companies in their plants, since they benefit from the economies of scale. Malt-O-Meal, known for its hot 
breakfast cereal, runs a large plant in Northfield, Minn., which produces private-label cold breakfast cereal. 
When one of the authors was on a plant tour several years ago, they were producing cereal for the Kroger 
supermarket chain. Some retailers, such as Kroger, do operate their own processing plants, most frequently 
in dairy (The Food Institute, 2009). 
Technology Driven Value Chain Changes 
One of the greatest changes in the food retail value chain in the last 25 years has resulted from the use of 
POS data by retailers to better understand consumer purchasing behavior, and thus improve everything from 
inventory management to product promotion. Because retailers have this data and the knowledge it provides, 
their bargaining power in relation to their suppliers has been greatly strengthened. The balance of power 
shifted from those previously with the most bargaining power, the suppliers, to the retailers starting in the 
1980s. Much of the impact of this shift had largely occurred before 2000. 
Retailers can now identify which items are selling well and which are not. Between 1996 and 2008, the 
number of SKU’s carried by the average food retailer increased by 50% to 47,000. To streamline the 
shopping experience for customers, who had become overwhelmed with the number of choices, many stores 
have now reduced their product selection, by as much as 15% (The Food Institute, 2009). 
The next major technological advance impacting retailers’ supply chain is radio frequency identification 
(RFID), which involves microchips that can be read by radio wave from a distance, replacing barcodes. 
Walmart has taken the lead among retailers in investing in the new technology and requiring its suppliers to 
adopt RFID. Although adoption has been slower than originally planned because of technical and cost 
issues, most of Walmart’s largest suppliers now must have RFID tags on every pallet and/or case shipped to 
its distribution centers. One industry analyst predicts Walmart will achieve annual cost savings of over $400 
million with pallet and case RFID, and much more if individual items are RFID tagged someday (Research 
Recap, 2010). One benefit would be the reduction in the occurrence of out-of-stock items in stores due to the 
improved inventory control made possible by RFID. 
The growth of smart phones with a myriad of applications, including location pin- pointing, is opening a wide 
range of new marketing possibilities. One potential use is sending electronic product coupons based on a 
consumer’s location in a grocery store, which is likely to evolve over the next few years as individual retail 
chains offer it on an opt in basis, meaning consumers will choose whether to participate. 
The Great Recession: A Major Driver of Change 
A major driver of recent change for retail food, including food stores, or groceries, and food service, or the 
restaurant side, of the business has been the substantial shifts in consumer food purchases due to the 
severe 2008-2009 economic downturn and very slow recovery. The food spending of households that were 
directly affected by the loss of a job or home to foreclosure changed the most. Even many families not 
directly impacted, given the uncertainty and concern for their future financial situation, became more frugal in 
their spending. Consumers ate away-from-home, at restaurants, less frequently and were looking for greater 
value in their grocery purchases. Many experts believe that, just as with the Great Depression, some of these 
consumer changes will become permanent, such as the greater frugality, and be part of what has been 
referred to as the “New Normal” (Davis, 2009). Consumer spending began to pick up in early 2010, although 
at a slower pace than when emerging from past recessions. 
Some consumers, who had been buying natural and organic, began to question the price premium for these 
products. Whole Foods, the upscale natural and organic food retail chain, saw its identical, same store sales— a key metric in retailing—fall by 4.3% in fiscal year 2009, after years of robust growth, as consumers 
sought lower prices (Whole Foods, 2009). In response, the company revamped its strategy to provide greater 
value to consumers. The “365” store brand, which is value-oriented with a lower price point than comparable 
products, was expanded to new categories. Whole Foods’ more value-oriented strategy, combined with the 
stabilization of the economy, has succeeded in turning the situation around with comparable store sales 
again growing. 
Casual sit-down restaurant chains, such as Applebee’s and TGIF, suffered substantial sales declines in the 
recession, whereas some fast food chains saw sales grow, as consumers traded down to economize. In the 
midst of the recession in 2009, McDonald’s U.S. comparable store sales actually grew by 2.6% (McDonald’s, 
2009). Restaurants are promoting more aggressively now than previously. Quick-service, fast food, outlets 
have adopted the “dollar menu”; casual family restaurants are doing more “kids eat free” and adding specific 
lower-priced menu selections on certain days; and more upscale, fine dining restaurants are discounting wine 
on slower nights, such as Sunday-Thursday. Across the board, restaurants have adjusted their menus to 
capture a more value-oriented consumer. In 2010, restaurant business began to improve along with the 
economy, albeit slowly (NRA, 2010). Although people are cooking more at home, take-out food has been 
less affected than dining out, since pizza delivery or a ready-to-eat meal from the supermarket can substitute 
for going out to a restaurant, providing a break for weary home cooks. 
Concluding Observations 
Most of these trends are likely to persist into the foreseeable future. The market share of grocery sales by 
supercenters and of private-label products should continue to grow, although perhaps at a slower pace. New 
technologies, such as RFID for logistics and electronic coupons sent to smart phones for marketing, will 
become more widely utilized. 
For More Information 
Birchall, J. (2010). Walmart aims to cut supply chain costs. Financial Times,January 3. 
Bustillo, M., and Timothy W. M. (2010). Walmart thinks smaller. The Wall Street Journal, April 22. Available 
online: http://online.wsj.com. 
Consumer goods in recession: The game has changed. (2009, August 22), The Economist, pp. 55-56. 
Davis, I. (2009). The new normal. McKinsey Quarterly, March, 2009. 
The Food Institute. (2009). Food Industry Review, 2009 Edition. Elwood, NJ. 
McDonald’s. (2009). 2009 Annual Report. Available online: http://www.mcdonalds.com. 
National Restaurant Association. (NRA). (2010). 2010 restaurant industry forecast preview. Washington, DC. 
Available online: http://www.restaurant.org. 
Packer, The. (2010). Walmart’s grocery sales increase. Top Stories from the Packer. Available online: 
http://www.thepacker.com. 
Porter, M. E. (1979). How competitive forces shape strategy. Harvard Business Review, 57(2), 137-145. 
Research Recap. (2010). RFID technology transforming food retailers like Walmart. March 18. Available 
online: http://seekingalpha.com. 
Whole Foods Market. (2009). 2009 Annual Report. Available online: http://www.wholefoodsmarket.com. 
Ben Senauer (bsenauer@umn.edu) is a Professor of Applied Economics at the University of Minnesota. Jon 
Seltzer (Selt9207@stthomas.edu), a former Vice President at SUPERVALU Corporation, works with The Food Industry Center at the University and teaches Marketing at the University of St. Thomas. 
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THE CHANGING FACE OF FOOD RETAILING

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