The Evolution of the Grocery Store

Published on July 6, 2017 in Retail Real Estate Industry and Grocery
Colleen Johnson
Colleen Johnson
Senior Vice President, Phillips Edison Grocery Center REITs 1 and 2

Share This Post

You have probably heard the adage, “The only thing constant is change.”  This sentiment is particularly apt for the grocery industry, which has experienced several evolutions since the concept was first conceived.  Amazon’s recent announcement regarding its pending acquisition of Whole Foods Markets signals just another change, not the end, for the industry.  In order to put this next phase of the grocery evolution in proper context, it’s important that we take a step back and review how grocery shopping has changed over time. 
 
“Grocery shopping” before 1900 meant visiting several different specialty stores, including the butcher, baker and greengrocer.  Nonperishable items (sugar, flour, tea) were purchased at the grocer who operated small stores with limited inventory.  The store clerk fulfilled customers’ orders rather than allowing shoppers to peruse, touch, smell and handle the merchandise.  The stores often sold on credit and offered home delivery.1
 
All that changed when The Great Atlantic and Pacific Tea Company (“A&P”) invented the economy grocery store in 1912.  A&P’s model relied heavily on volume, standardization, and marketing, and did away with credit sales and delivery, moving to a cash-and-carry system.1 In addition, the invention of the modern cardboard box and the beginning of commercial use of the tin can provided a sanitary way to keep food fresh and allowed A&P to effectively market their own, private-label products.  Only a few years later, in 1916, Clarence Saunders launched the concept of self-service grocery when he opened the first Piggly Wiggly store in Memphis, Tennessee.2 A&P implemented similar stores shortly thereafter.  All of this set the ground work for other chains like Kroger, American Stores and Safeway to emulate A&P and caused a chain store explosion. 
 
The next radical change in the industry took place in 1930 in Queens, New York when Michael Cullen opened the first ‘supermarket,’ King Kullen, which “fulfilled all five criteria that define the modern supermarket: separate departments, self-service, discount pricing, chain marketing, and volume dealing.”3 Interestingly, Cullen once worked for A&P and Kroger and shared his idea with Kroger, who did not respond, so Cullen quit his job to open King Kullen.3  Cullen’s success depended, in part, on three factors: residential use of refrigeration, cellophane to keep perishables fresh, and the proliferation of automobiles.  Instead of walking to the local store, customers could drive several miles, park their car in a parking lot, and purchase perishable foods that they could put in their own refrigerator.
 
The 1950’s and 1960’s brought the grocery-anchored shopping center to the suburbs and provided a cross-shopping experience for customers.  With these new centers, a shopper could get a haircut, drop off their dry cleaning, and grab a sandwich, all in one place.
 
The first club (or warehouse) store was introduced in 1976 by Sol Price.4 “Price Club was initially only available to business customers, but was later opened up to certain groups, such as employees of local businesses, nonprofits, or government. It charged shoppers a $25 annual membership fee to purchase bulk products at discount prices in a no-frills warehouse setting.”4 Price Club would later merge with Costco in 1993 and Costco would continue to dominate this format, providing that unique treasure hunt experience that continues to delight customers.
 
Without doubt, the biggest disruptor to the grocery industry came in 1988 when Wal-Mart opened the first Wal-Mart Supercenter in Washington, Missouri, combining general merchandise and a full-scale supermarket to provide one-stop shopping convenience.5 Today Wal-Mart has over 3,500 stores and sells the most groceries in the United States, with 2016 grocery sales topping $200 billion.5
 
Partly due to Wal-Mart’s success, but also to improve store performance by creating efficiencies in buying and back-office functions, traditional grocers went on a spending frenzy and grew through acquisitions.  During the 1990’s, there were approximately 3,500 stores acquired comprising $67.1B in sales.6
 
The 2000’s saw the growth of stores focused on both ends of the income hourglass.  Whole Foods, in particular, benefited because higher incomes gravitated towards the natural and organic offerings, which blossomed during this time and expanded beyond food to health and wellness, household cleaners and pet food.  On the other end, lower income families sought out limited assortment stores, such as Aldi.  Strong, adaptable traditional grocery stores took notice and dedicated more shelf and floor space to both of these concepts, especially expanding their natural and organic perishable offerings.
 
The next major evolution arrived with online ordering of groceries.  The current estimated amount of groceries sold online in the United States is between 1-2%7 of the $820 billion industry,8 mostly because people want to pick their own fruits, vegetables, meats (such as beef, chicken, and pork) and seafood.  However, true to the premise of this article, strong grocers will adapt and today we see grocers effectively competing in this avenue by rolling out their own home delivery, implementing click and connect options (order online and pick up at the store), and partnering with third parties, like Instacart or Shipt.
 
Today, the news is flooded with stories that herald the demise of the physical grocery store. It could be strongly argued that Amazon’s $13.7 billion purchase price just provided 13.7 billion reasons why the grocery store remains relevant and necessary.   Notwithstanding, grocery stores need to continue to adapt and be flexible, providing customers with what they seek today:  (a) an experience, whether through wine tasting, cooking classes and in-store dietitians;  (b) a social gathering place; and (c) upgrading the restaurants inside their stores (called “grocerants”).
 
If we accept that change is inevitable, this is just another phase in the ever-evolving, ever-changing grocery industry.  When the television was invented, it was thought to be the demise of the radio.  Clearly this did not occur and both media outlets continue to co-exist, as well as new on-line radio and even satellite radio.  In the grocery (and retail) world, there is a name for this: omni-channel, which is the co-existence of bricks and mortar and online, both of which are needed to be successful in today’s environment.  Amazon’s acquisition of brick and mortar Whole Foods is further proof of this.
 
So fear not all my lovers of grocery shopping, the grocery store is not going away any time soon.  It will certainly change, but it will remain.
 

Footnotes:

  1. The Evolution of the Supermarket Industry: From A&P to Walmart by Paul B. Ellickson, March 15, 2015.
  2. Pigglywiggly.com
  3. Kingkullen.com
  4. Wikipedia.com
  5. Walmart.com
  6. Grocery Retailers Demonstrate Urge to Merge by Phil R. Kaufman, published in The Magazine of Food Economics, 2000, vol. 23, issue 2.   Some notable mergers included Ahold’s acquisition of Stop & Shop and Giant Food; Safeway’s acquisition of Von’s, Dominick’s, and Randall’s; Kroger’s merger with Fred Meyer; and Albertson’s merger with American stores.
  7. Kantar Worldpanel, December 29, 2016 article, Global e-commerce grocery market has grown 15% to 48bn.
  8. Progressive Grocer’s 84th Annual Report of the Grocery Industry, April 13, 2017.  Note: figure includes $669B of Total Supermarket Sales and $153B for conventional clubs.
Colleen Johnson
Colleen Johnson
Senior Vice President, Phillips Edison Grocery Center REITs 1 and 2