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Why the grocery business is now retail’s hottest niche

Why does everyone want a seat at the low-margin grocery table?

“I don’t know that there’s a current grocer in the market that’s not looking or working on a site,” says Deb Carlson, a veteran commercial retail real estate broker with Bloomington-based Cushman & Wakefield/NorthMarq.
MinnPost photo by Corey Anderson

Woodbury may seem like a typical suburb with the usual share of coffee shops, retail outlets and grocery stores. But the east metro enclave is one of the emerging battlegrounds in the intensifying store wars between grocery retailers in the Twin Cities.

Twin Cities BusinessFrom the windows of Kowalski’s Markets headquarters, chief operating officer Kris Kowalski Christiansen overlooks Radio Drive, one of Woodbury’s main arteries. A couple of miles up the road, a new Whole Foods Market is slated to open in the spring of 2017. Two miles to the south, a Jerry’s Foods will open this spring. Just about every player in the industry is, or soon will be, in the city. “Trader Joe’s is already here. We’re here, Byerly’s is down the road: [They] took over the old Rainbow site,” she says from her office above Kowalski’s 48,000-square-foot store.

“I don’t know that there’s a current grocer in the market that’s not looking or working on a site,” says Deb Carlson, a veteran commercial retail real estate broker with Bloomington-based Cushman & Wakefield/NorthMarq.

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Phil Lombardo, chief marketing and merchandising officer for Lunds/Byerly’s, estimates that there has been a 50 percent increase in local retail space dedicated to selling groceries over the last 10 years. His tally includes the burgeoning grocery square footage at Target and Wal-Mart. “We added six stores last year,” he says, “that’s significant growth for us.”

Meanwhile, grocers across the Twin Cities are bracing for the arrival of Hy-Vee, which boasts annual sales topping $8.7 billion. The company, based in West Des Moines, Iowa, operates 235 stores in eight Midwestern states, including 17 in southern Minnesota. At the end of 2014, Hy-Vee was on track to open in New Hope and Oakdale in the second half of 2015 and Lakeville in 2016.

“Our proposed expansion into the Twin Cities would add several stores over the next several years. There are more new store projects in various stages of research and development,” says Hy-Vee spokeswoman Tara Deering-Hansen via email. The company won’t reveal how many stores it plans to open in the Twin Cities.

Kowalski’s leaders, from left: Mike Oase, vice president of operations; Deb
Kowalski, administrative director; Mary Anne Kowalski, co-founder; Kris
Kowalski Christiansen, COO; Boyd Oase, director of meat and seafood; Terri
Bennis, vice president of perishables.

In addition, several smaller players are looking to pitch a tent here. Fresh Thyme Farmers Market, based in the Chicago suburbs, is set to open its first Twin Cities store in Bloomington this coming fall and is scouting more locations. Other chains, including Boulder, Colo.-based Lucky’s Market and Fletcher, N.C.-based Earth Fare, are also looking for locations here. Hometown co-op grocers are expanding as well. Eden Prairie-based Lakewinds Food Co-op opened its third location in 2014, in Richfield. Carlson, who represents Lakewinds, is already looking for a site for a fourth location.

Kowalski’s is flexing its own muscles. A new 17,000-square-foot Kowalski’s store opens in Excelsior in June, its first in the affluent western suburbs. The store will feature concepts new to the company—made-to-order pasta and restaurant-style sushi. It’s Kowalski’s 10th location and its first since Eagan in 2008. Kowalski Christiansen says that the company is scouting other sites west of the Mississippi.

Experts naturally anticipate an eventual saturation point. “There are going to be some losers in this battle,” Carlson says, “there just has to be.”

But for now, it’s an all-out food fight.

A looming grocery glut?

Three factors appear to be fueling the recent feeding frenzy:

First is that the region had a slight shortage of stores compared with national averages. “You look at where we were even five, six years [ago], and our market had fewer grocers than just about any market in the country,” says Sara Martin, a retail broker with the local office of Colliers International. “I think maybe we’re playing catch-up rather than going overboard.”

The most recent statistics from the Metropolitan Council show that the Minneapolis-St. Paul area grew by 3.6 percent between the 2010 census and 2013, adding more than 101,000 people in just three years to boost the population of the core seven-county metro area to 2.95 million. But stores are opening at a much faster clip. Lunds/Byerly’s counted 7.9 million square feet of grocery retail space across the Twin Cities in 2002; that number had climbed to 11.9 million square feet in 2013.

Coborn’s… delivers

St. Cloud-based Coborn’s Inc. is one of the largest Minnesota-based grocery retailers, with 120 food, gas, convenience and liquor stores (80 in Minnesota), with revenue of $1.3 billion to $1.4 billion in 2014. Its market focus is mainly rural and small towns, but it operates stores as close to the metro as Elk River, Hastings and Buffalo. Coborn’s main Twin Cities presence is through its CobornsDelivers grocery delivery service.

Still, some major Twin Cities suburbs are without grocery stores despite high population densities. New Hope officials, for example, are excited to be getting a Hy-Vee store later this year.

Second is a national trend for shoppers to spread their loyalty around. In 2014, 9 percent of shoppers indicated they had no single regular grocery store—triple that of recent years, according to the Food Marketing Institute’s (FMI) 2014 Grocery Shopper Trends Report. The trend is driven by changing shopping patterns of millennials.

“What appears to be driving these shifts is the dynamic of diversification; shoppers are becoming less likely to choose any one store to satisfy all their needs,” says the report. “Shoppers are optimizing their satisfaction store by store and department by department.”

The third factor is a convergence of demographic, employment, housing and values changes in recent years. The result: Despite ever-busier lifestyles, more grocery shoppers purchase what they need for the day, or the next day, instead of for a week or two at a time. They’re also looking for more perishable fresh produce and healthy pre-made foods they can buy and eat on location.

“Consumers still talk fondly about once-sacred rules and rituals—three distinct meals a day, the family dinner, etc.—but modern eating culture has changed these rules,” says FMI. “In today’s eating culture, the only thing that is certain is that eating can happen anywhere, everywhere and anytime.”

One trip to the grocery store says a lot about the way the once-staid business is changing. As diets shift, stores are ramping up organic and natural food options. Food is a staple for everyone, but good food often feels like one of life’s small, affordable luxuries.

“Half the grocery shoppers [think] it’s a convenience factor,” says Kowalski Christiansen, “and I think half are driven by products, quality and service.”

Salad days: Carving out a niche

In some ways, Kowalski’s timed things just right: Its approach seems to perfectly fit the growing percentage of shoppers who want smaller-format stores offering high-quality fresh produce, meat and ready-to-eat products.

When Jim and Mary Anne Kowalski started Kowalski’s in 1983, their vision was simply “to make our mortgage payment and get Kris through college. That really was it,” says Mary Anne matter-of-factly. (Jim Kowalski died in an accident in 2013.) At the time they had a single store on Grand Avenue in St. Paul and no big plans for growth.

Three decades ago, she says, they saw little maneuvering room among traditional grocery stores, but little competition among upscale grocers (a niche dominated by Byerly’s and Byerly’s alone). “The only plan we ever made was to transition from a conventional to an upscale market. That was a strategic move,” she says, in part because they knew Wal-Mart would soon be entering the market. Since then, other big-box stores with groceries have expanded throughout the Twin Cities, including Sam’s Club and Costco.

As the years passed, other retailers started selling groceries, including home improvement chain Menards, Target, Holiday gas stations and pharmacy retailers Walgreens and CVS. Back in the 1980s consumers bought groceries at a grocer; today, basic selections of packaged food, beverages, and grab-and-go hot snacks and sandwiches are just about everywhere.

While groceries have typically been a low-margin business that worked on high sales volumes, it continues to be an attractive sector for companies such as Target and Wal-Mart. According to Wal-Mart’s annual report, 56 percent of the company’s sales are groceries. For Target, food and pet supplies amount to 21 percent of U.S. sales, which translates into nearly $15 billion in sales in FY2013; Target sells more groceries than the $14.2 billion sold in FY2014 at Whole Foods.

While everyone theoretically competes with everyone, not all retailers are chasing the same customer. Big-box players offer shoppers a value proposition, while hoping to sell them other higher-margin goods in the process, such as medications or bedding. Stores like Whole Foods, Kowalski’s, Lunds and Byerly’s cater to an upscale customer with a foodie sensibility. A chain such as Aldi competes with rock-bottom prices.

Hy-Vee differentiates by operating stores that are larger than a typical Cub Foods. Within its 90,000-square-foot format it aims to feel like a Lunds store but offer prices more on par with Cub, based on what Hy-Vee officials told New Hope city officials when announcing plans there.

Somewhere over the Rainbow

But how much depth does the market have? Might the Twin Cities already be reaching a saturation point for grocery retailers?

Last fall, Hy-Vee and local developer Opus Development Co. dropped plans for a store in Maple Grove after city staffers expressed concern about the number of grocery stores already in the area.

Last May, Milwaukee-based Roundy’s Inc. announced it was pulling out of the Twin Cities, selling 18 Rainbow stores for $65 million and closing its nine other locations. Roundy’s statement was blunt: “The economic downturn over the last few years, coupled with an increased competitive footprint in the Minneapolis/St. Paul market, has made it difficult for Roundy’s to keep the Rainbow banner competitive.”

The question is whether Rainbow’s troubles were a sign of such saturation or merely an opportunity for other retailers to grab market share. “I can’t speculate when the saturation point is going to hit,” says Kowalski Christiansen. “Typically if it’s oversaturated, someone shakes out.”

Cub Foods is hardly sitting still, completing 13 store remodels and acquiring 10 Rainbows in 2014. Cub is also planning a new store in White Bear Lake. Veteran industry analyst Todd Hale, formerly senior vice president of Consumer and Shopper Insight for New York-based Nielsen, says growth potential exists for retailers catering to the upper and lower ends of the market. Traditional middle-market grocers—the landscape where Rainbow fought and lost in the Twin Cities—are finding it a tougher go.

“About 70 percent of the expansion that we’ve seen from supermarkets in the last eight years or so has come from niche [retailers],” says Hale, now an independent consultant. He sees that growth divided between “natural gourmet” players like Whole Foods Market and “limited assortment/deep discount” retailers such as Aldi at the other end of the spectrum. “It’s the extremes, I think, where we’re seeing the winners.”

Retail broker John Johannson, senior vice president with the local office of Colliers International, isn’t losing sleep about the influx of new grocers. In his read of the market, Rainbow simply lost the war to Cub, so it picked up its carts and left town.

“The consumer votes by where they spend their dollars and they’re telling you constantly what they want,” says Johannson. “It’s not an easy market.”

But Johannson says that competition among grocers means that the average consumer has many more options than they did 20 years ago. He expects Hy-Vee to carve out its own corner of the market.

“I think they’re really good and I think they’ll find their niche,” Johannson says. “The grocery market has never ceased to amaze me. There’s something for everybody, that’s the way I look at it.”

Burl Gilyard is senior writer for TCB.

This article is reprinted in partnership with Twin Cities Business.