Skip navigation


The supermarket industry expects to find growth over the next two years through ethnic groceries, in-store pharmacies, self-checkout and fresh departments -- with value-added produce and case-ready meats leading the way -- while it looks nervously at the threat posed by supercenters, especially those operated by Wal-Mart Stores, Bentonville, Ark.These are the findings of a survey conducted by SN through

The supermarket industry expects to find growth over the next two years through ethnic groceries, in-store pharmacies, self-checkout and fresh departments -- with value-added produce and case-ready meats leading the way -- while it looks nervously at the threat posed by supercenters, especially those operated by Wal-Mart Stores, Bentonville, Ark.

These are the findings of a survey conducted by SN through its Web site,, earlier this year. Nearly 150 food retailers, wholesalers, suppliers and sales agents responded to questions about the top industry growth opportunities.

A guarded optimism characterizes the resulting industry snapshot.

A large majority of respondents said they expect supermarket sales to grow modestly over the next two years, with 39% predicting 1% to 2% growth and 29% forecasting that growth will come in between 3% and 4%. Both wild optimism and grim pessimism were in relatively short supply. Only 18% of survey participants said they expected supermarket sales to remain stagnant or contract, while a mere 12% predicted growth of more than 5%.

Fresh Opportunities

A commanding majority of respondents -- 63% -- said the fastest growth will come from one part of the supermarket, the fresh department.

Here is how some of them explained their choice. (To protect the privacy of the respondents, all comments are anonymous.)

"Fresh foods are how supermarkets can differentiate themselves from mass merchants and club stores."

"These departments set the tone for the overall store appeal. It can set them apart from the mass merchant as well as connect supermarkets to the consumer who is looking for a perceived fresh value rather rather low prices."

"Consumers are still focused on health, weight and nutrition. As the scams get put down, the best diets will come to the surface and those are the ones that stress fresh fruit, vegetables, quality meats, breads, etc."

"If you focus on fresh food and set higher standards, you will stand out above the rest."

"As Wal-Mart takes away center store from supermarkets despite supermarkets lowering core grocery prices, the fresh departments will promote their offerings more aggressively as these departments have a higher gross margin vs. constantly lowering grocery department margins to meet Wal-Mart."

One area of fresh, home meal replacement, found considerable favor with many respondents, although HMR was mentioned nowhere on the questionnaire.

"I see people wanting to eat healthier, and they like the convenience of picking up freshly prepared food for their families."

"Consumers will continue to demand value-added products for fast meal solutions."

"Supermarkets have become the convenience stores of the new century, and to that end, HMR is their big advantage over the club stores and Wal-Mart."

A much smaller number of participants expressed great expectation for other store departments. Slightly more than 12% said leased departments were likely to be the growth leader, followed by slightly less than 12% for nonfood, 9% for ancillary services, and 4.3% for grocery.

Leased services' adherents were particularly enthusiastic.

"Leased departments are a great idea, and one that is gaining momentum. The right merger of products could be a big push for supermarkets and help them differentiate."

"Traditional departments within grocery stores have been a little stagnant over the past couple of years. I believe supermarkets will look to the growth in various sectors such as Starbucks to set themselves apart from the 'me too' retailers of today."

Nonfood also had devoted advocates.

"I see supermarkets trying to implement more general merchandise ideas as they try to grab some of the excitement happening with dollar stores. Higher profit possibilities vs. grocery, exciting stuff."

"Stores are fast increasing the number of health-and-beauty-aids items, and promoting fewer and fewer of the staples."

Support for ancillary services, in contrast, ranged from gung-ho to grudging.

"Gas is going to drive the ancillary services. Fuel stations!!!"

"My original thought was fresh food. However, after 20-plus years of trying, I do not think it will yield the desired results. Therefore, I believe there is strong growth potential in ancillary services."

Supercenters Steamrolling

Asked to rate (on a scale of 1 to 5, with 5 being the highest) which retail format has the greatest potential for growth in the next two years, respondents chose supercenters hands down, with 68% of survey participants giving the big boxes a 4 or a 5. Other formats in descending order were natural food stores (51%), dollar stores (43%), warehouse clubs (39%), and drug stores (27%). Only 19% of respondents rated the growth prospects of supermarkets as 4 or 5, putting them in a virtual dead heat for last place with convenience stores (also rated 19%).

Comments on supercenters tended to combine admiration, awe, envy and fear.

"Wal-Mart is doing everything right. In addition, with its movement to expand globally, it will continue to educate the consumer on the Wal-Mart experience."

"The only real growth has been in the supercenters. They go into a market and end up closing the smaller competitors. That is how they grow their business. They do nothing to increase the overall sales in the industry. They are just adsorbing other volume."

"Wal-Mart has already committed to doubling its business by 2005. Who else can commit and follow through on such a note as that?"

The growing popularity of natural foods (and the resulting success of natural food stores) was greeted with calmer comments.

"Natural food stores will attract consumers who are told by medical leaders to eat better diets."

"More people are choosing natural products and focusing on healthier living."

Warehouse clubs were viewed as an increasing threat to supermarkets.

"I feel warehouse clubs will continue to tweak their perishable departments, and improve their volume and profitability."

As were dollar stores.

"Dollar stores are the fastest-growing retail segment. They combine low start-up costs and low overhead with huge consumer appeal in a tightening economy."

And many respondents had good words to say about several formats, except conventional supermarkets.

"Consumers are going to buy big at the supercenters for convenience and savings. Natural food stores will also be rewarded by baby boomers aging and trying to stay healthy."

"Traditional supermarkets will lose market share to the Wal-Marts and club stores. Dollar stores will gain due to customer curiosity; they like that garage sale atmosphere. The good natural foods stores will certainly grow as the baby boomers look toward healthier living."

Growing Categories

Looking at grocery categories, respondents said the growth for supermarkets will come from ethnic (rated a good or excellent growth category by 85%), organic (71%), and private-label (71%) products. The trailing grocery categories were enhanced bottle waters (63%), frozen (59%), national brands (50%), lower-fat ice cream (44%), and instant hot cereal (25%).

Some respondents were nearly ecstatic about the potential of ethnic foods.

"My sales are up 8%-plus for the last two years simply because I got out of the box and started marketing to my different ethnic groups instead of just dabbling in it. My market changed, and I had to commit to the next customers, and the growth has come right along with it."

Many respondents linked ethnic and organic categories as areas that supermarkets have long neglected.

"Major supermarket chains have been terrible at tapping the ethnic and organic markets. Small retailers have been successful at meeting the needs of these consumers, but the reach of these smaller chains is limited. There is a lot of potential for large supermarkets to implement these categories and bring them to the consumers who are looking for them."

"Ethnic and organic have been underdeveloped over the years, and the slow-moving retail sector is finally getting on board. Now that consumers have embraced organic and the ethnic communities have grown, I expect stores to stay on top of it and growth to be substantial."

Most of the fresh-food concepts were favorably greeted by respondents, with value-added produce (rated good or excellent by 77%) leading the pack, followed by case-ready meats (67%), food-service co-branding (58%), and organic fresh bakery (54%).

Trailing very far behind was self-service seafood (40%), which received only negative assessments from those who added written comments to their fresh-food responses.

"Self-service seafood makes me nervous. I still prefer counter service for quality concerns."

"Convenience and freshness are critical. Seafood has enormous potential as a service area. Customers demand freshness, information and creative ideas, particularly with seafood."

Some respondents took an all-of-the-above attitude.

"All non-consumer-packaged-goods areas are key for stores to grow and differentiate, so I expect all to be successful."

Value-added produce was praised for making shoppers' lives easier.

"Value-added produce gives back to the consumer their most valuable resource, time."

"There is value in the convenience of pre-prepped veggies."

However, not everyone thought salad-in-a-bag was the greatest thing since sliced bread.

"Fresh foods still need service. Shoppers want to know how to prepare them. Already-prepared is often too high a price point in today's economy."

Most of the comments about case-ready meat were also favorable.

"Case-ready solves lots of problems for the retailer, and has excellent appeal for the consumer."

"Case-ready is the future for the meat department."

But again there was some dissent.

"Consumers are not ready to let go of their butcher or their need to touch and smell meat."

"Case-ready meats are being proven by Wal-Mart, and will be accepted as the norm in the next 10 years. This will open the market for specialized market-cut butcher shops."

Food-service co-branding was largely accepted as a good idea.

"Food-service co-branding is a win-win situation for all involved. The customers like the brand name, the brand has more exposure, and the retailer has increased sales."

Organic fresh bakery provoked support along with concern about execution.

"Organic bakery items taste better than packaged-and-preserved, and have a much broader appeal to the more educated consumer who is coming to the forefront."

Nonfood's Potential

Survey participants were generally optimistic about the growth potential of a variety of nonfood offerings. They were most favorable about in-store pharmacies (rated good or excellent by 74%), followed by vitamins and supplements (72%), dollar sections (67%), seasonal merchandise (66%), digital photo kiosks/services (57%), natural health-and-beauty-care products (57%), and DVD sell-through (52%).

Here, however, the all-of-the-above attitude was tempered with caution.

"I think this is where retailers really have opportunities to show how much they understand their consumer. Things like a general merchandise dollar aisle or point-of-purchase DVD displays can be very lucrative if you are in the right markets to capitalize on these things."

And there was also some none-of-the-above opinion as well.

"Supermarkets will have to change the strategic role of these departments to capture a bigger piece of the pie."

Some respondents noted that supermarkets have a big time-saving edge over drug stores as fillers of prescriptions.

"Pharmacy in a grocery setting is very convenient compared to the chain drugs. You cannot shop in a drug store long enough to wait for your prescription, and you end up standing around waiting, whereas in a grocery store, you are accomplishing two things at once."

Vitamins and supplements were widely seen as having strong potential as well.

"Vitamins and supplements will continue their strong growth given the health of America. The average American consumer's waistline is expanding, and consumers feel that supplements will be the easy way out."

Dollar sections were also generally viewed as places were supermarkets could grow sales.

"Dollar sections are continuing to provide new items every day. The attention is already established with the consumer. If the supermarket industry would stop using the excuse of 'we're trading the customer down from the higher dollar of national brands,' these areas would explode within the retail grocery industry."

A few respondents, however, said dollar sections were played out.

"Dollar sections are the worst idea in grocery yet. Fifteen years ago they were all right, but now they are terrible dollar and unit producers."

In the past, the supermarket industry has been criticized for being a slow adopter of new technology. The answers to our survey would tend to indicate that this might still be the case.

Growth Through Better Technology

Some technology-driven systems have gained the approval of the majority, including self-checkout (rated good or excellent by 69%), loyalty/gift programs (66%), electronic shelf labels (60%), and electronic conversion (56%).

Others, however, still have a long way to go before they win acceptance, notably kiosks (45%), biometric payment (37%), and online shopping (37%).

Some respondents said technology is largely an opportunity to expand the distance between consumers and their grocers.

"Self-checkout will grow because it saves money [further alienating consumers, I suspect]. Loyalty programs will grow, but it is doubtful they will deliver new income. Kiosks and biometrics will be rejected by consumers."

Others offered a more balanced forecast for technological change in supermarkets.

"Self-checkout will need to be more friendly to larger-purchase consumers. Loyalty cards will help keep customers. Online shopping will have limited growth. Electronic shelf labels will ease labor costs. Technology overall will win when it makes sense." And a few maintained that consumers will grow comfortable with the digital age, but only with time.

"Acceptance of the electronic world by shoppers will grow with the aging of the boomers, but it will take maybe five or six years before the shift will become more obvious."