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Prime Time For Deep Discounters

American consumers, under their greatest financial pressure in recent memory, are reevaluating their shopping trips, basket selections and store destinations. And it appears these trends could be benefiting extreme-value operators such as Grocery Outlet, Aldi and Supervalu's Save-A-Lot, and dollar chains such as Dollar General, Family Dollar and Dollar Tree. We're seeing a dramatic increase in new

American consumers, under their greatest financial pressure in recent memory, are reevaluating their shopping trips, basket selections and store destinations. And it appears these trends could be benefiting extreme-value operators such as Grocery Outlet, Aldi and Supervalu's Save-A-Lot, and dollar chains such as Dollar General, Family Dollar and Dollar Tree.

“We're seeing a dramatic increase in new faces in our stores in the past few months. The economy is forcing customers into our bands of relevancy,” Eric Lindberg, co-chief executive officer of Grocery Outlet, Berkeley, Calif., told SN. The chain operates 130 stores and generates annual sales that exceed $600 million.

His observation supports findings of a recent Citigroup Global Markets survey, in which 24% of consumer respondents said they'd shop for groceries at a cheaper store if food prices continue to rise, and 12% had already begun to do so within the past year. Retail analyst Deborah Weinswig wrote in the report that she expects to see “an increase in trading down … where more consumers switch from their preferred supermarkets to lower-priced retailers” if food inflation keeps up.

Batavia, Ill.-based Aldi, owned by the German retailer of the same name, claims that, despite limited assortments in cut-case displays, it can supply up to 90% of household needs and save shoppers up to 50% on their baskets.

The chain recently conducted a price survey revealing that shoppers could save about $115 on a basket of 184 items that are “very important to customers,” ranging from apple juice to frozen chicken breasts. The Aldi basket averaged $286.37 vs. an average $401.47 for the survey's combination of discounters, big-box stores and traditional supermarkets.

The chain's nearly 900 stores (averaging about 8,000 square feet) focus on 1,300 fast-turn items, primarily private-label canned and paper goods, and devote 40% of space to fresh meat, produce, dairy, bakery and frozens. With such concentration, Aldi dictates product specifications and pricing. It appeals to suppliers by taking no rebates, discounts, coupons, slotting fees or unwarranted deductions, and it offers the prospects of distribution beyond the U.S.

Aldi also recently rolled out a nine-week, price-cut pilot program on more than 100 top-selling items in the St. Louis market, where Schnuck Markets slashed prices on about 10,000 items a year ago.

Aldi's price drops ranged from 12% to 27% and could become permanent, Paul Piorkowski, vice president of Aldi's O'Fallon division, told SN at the initiative's start. “We feel the timing is impeccable.”

Since Grocery Outlet's start after World War II, the chain has evolved into a large-scale remarketing grocer with product reconditioning, relabeling and package modification services. Three-quarters of what it buys from 2,500 branded manufacturers are overstocks, factory seconds, package-design changes and overrun merchandise; the rest is made-to-order consumables such as produce, milk, bread and eggs to round out the shopping trip.


“We won't divert product. We're not interested in doing things manufacturers don't want us to do,” said Lindberg.

The entrepreneur-run, no-frills 20,000-square-foot stores carry 3,500 SKUs at a time “with a Tide, a Gain or Cheer on the shelf alongside a private label from a Spartan Stores or H-E-B,” said Lindberg. “I tell people we carry 35,000 SKUs, but it takes me a year to do it.”

Since expanding perishables in 2000, Grocery Outlet has gotten “more of the complete shop. People buy as much as they can here first, then go elsewhere to fill the rest of their needs. There's no stigma in bargain-hunting today.” Some stores have fresh meat, beer and wine, but all have frozen, deli, refrigerated, produce and seasonal general merchandise. With a nod to health, Lindberg noted stores “have a ton of power bars.” Produce has grown fastest in this Western operator the past five years to nearly 8% of sales, while beer and wine has doubled to about 4% of sales in the past six years.

Some stores can turn a shop into an outing. An established farmers' market comes to the Hollywood district store in Portland, Ore., every summer Saturday for its naturals-oriented clientele. With similar happenings in Seattle, along with blood drives, Habitat for Humanity, immunization and flu shot programs, local neighborhood marketing is a differentiator: “We're on the pulse of communities we serve,” said Lindberg, whose chain two years ago built excitement with a car giveaway promotion to acquire email addresses and build continuity in its com- munications with customers.

Perhaps more striking, Grocery Outlet claims to be 20% to 25% less expensive than Wal-Mart Stores and 40% to 50% less costly than conventional chains — and yield higher net profits on gross margins that compare with those of traditional supermarkets.

Meanwhile, 1,180 Save-A-Lot stores (see Page 16) offer similarly steep savings vs. conventional grocery stores on custom and national brands of packaged goods, fresh meat, produce, nonfood and $1 general merchandise items. The operator carries about 1,250 consumable items (about 80% private label, 20% name brands) and, especially in the larger, 18,000-square-foot stores, nearly 4,000 SKUs of dollar-priced general merchandise.

To emphasize fresh, Save-A-Lot is currently moving produce departments to the front of 316 stores; to become more health-relevant, it is adding a 42-item set of low-sugar, low-fat and low-sodium products to 1,122 stores; to begin serving the under-banked, 73 stores will allow shoppers to cash checks, pay bills, transfer funds by wire and buy money orders, Jackson said.

These three operators are leaders in the extreme-value channel, which captures 22% of the nation's $97 billion in lower-income grocery spend, Mike Jackson, president and chief operating officer of Save-A-Lot and Supervalu's Retail East division, told investors this winter.


Extreme-value stores have typically appealed to households of $35,000 annual income and less — 44% of households or 120 million people — though anxious times will likely push their shopper counts even higher. An ACNielsen study showed, for instance, that 40% of households with annual incomes of $70,000-plus regularly shop at extreme-value stores.

The tenure of Grocery Outlet (since 1946), Save-A-Lot (since 1977) and Aldi (first U.S. store in 1976, and a pesky thorn in Wal-Mart's side) demonstrates the extreme-value format is more than an opportunistic offshoot of a bad domestic economy.

“We've never had a down year,” said Lindberg.

“Of course, they're sustainable in good times and bad,” said Bill Bishop, chairman of the Willard Bishop consultancy in Barrington, Ill. “They've been around in all economic cycles. They have the vision, the relationships, and they understand the business model.”

Another reason for their success is their ability to attract immigrant populations. “We have an above-average Hispanic demographic, but we're not uniquely positioned,” said Lindberg. “I believe that first-generation immigrants who aren't acculturated or speak English find us less appealing because we don't have banking services, fresh meat in all stores and tortillerias. However, second and third generations are drawn to our values. They're very family-oriented, they shop and eat at home more often, and they're willing to work harder at food than most Americans. They're also very brand-loyal, they find our brands very reassuring, and they like when we bring in brands from Mexico such as Gamesa.”

Consumers with limited dollars still don't want to compromise on food safety — with memories of E. coli in spinach, massive meat recalls, and melamine in pet foods and lead paint on toys from China fresh in their minds. If some question whether low prices create a trade-off such as short dates or mishandled products, Grocery Outlet's Lindberg is ready with an answer.

He calls the chain “maniacal about product code dates and food safety,” and has in place an instant response to product recalls: A bell rings at headquarters, as at a firehouse, and all 100 employees drop everything to call their specific assigned stores to pull product from shelves within 30 minutes, “no ifs, ands or buts. … We can pinpoint, isolate and pull product because we procure nearly 100% directly from manufacturers. There are no intermediaries. We know the chain of custody. We have to be better than anyone. We're the face of the manufacturer.”

A food safety expert, Robert B. Gravani, professor of food science in the College of Agriculture and Life Sciences at Cornell University, Ithaca, N.Y., thinks such plans are necessities.

His message to operators that recondition products is that people need confidence the items are safe and wholesome to consume. “Are they properly cleaned and sanitized? Are there reasonable assurances these products have been stored in safe environments, at appropriate temperatures? If frozen, we don't want them thawed and refrozen several times,” he said.

Extreme-value retailing has tenacity,” said Lindberg. “So much of retailing today is about trying to sell less for more. We try to sell more for less.”

That philosophy continues to drive Grocery Outlet, which eyes an eventual doubling of store count within its current six Western states of Arizona, California, Idaho, Nevada, Oregon and Washington.

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