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Inside the Grocery Store Boom: How Kroger-Albertsons Merger Shapes Market Growth and Competition

The following information has been sourced from Twin Cities Business, "Inside the Grocery Store Boom" written by Adam Platt, executive editor at Twin Cities Business magazine, a position held since 2011. Twin Cities Business is a reputable industry publication known for its insightful coverage of the grocery sector.

 

Inside the Grocery Store Boom

The number of places we buy groceries has more than doubled in two decades. Are we all that hungry?

June 14, 2024

The ever-changing grocery industry and what it looks like after 2024.

The grocery industry is one of the oldest trades in existence. Grocery stores may look similar to the ones you frequented as a kid, but in the last 20 years the business has been turned inside out. In late May, Kowalski’s opened a store at Southdale, the first of a coming wave of groceries in regional shopping malls, which are desperately in search of customer traffic.


This bit of back-to-the-futurism (Southdale opened with a Red Owl, and the Kowalski family used to operate Red Owls) is just one of many changes to the places we grocery—from glorified gas stations to big box discounters, dollar stores, and the internet.

All the growth is mitigated by consolidation, as distinctive regional brands continue to be absorbed by the nation’s two mega-grocers, Kroger and Albertson’s, which are themselves trying to merge. (Fun fact: Minnesota is the only U.S. state in which neither operates.) Among Minnesota’s distinctive mix of independent grocery retailers, it’s a time of opportunity, but also challenge, as the business expands and contracts and morphs all around them.


The quest for Market Share and the Grocery Industry is Changing | Strategic Resource Group

The quest for market share

Looking through a 20-year lens, aspects of the grocery business are unrecognizable from 2003 (per data from industry trade publication Chain Store Guide, the earliest year for which such data is available). A few things are unchanged. Then as now, the largest local grocery retailer by stores and market share is Cub. (Historical data about Cub is muddled because it operates a mix of owned and franchised stores. For example, Kowalski’s franchises a single Cub in Maplewood and CSG assigns that store’s market share to owner Kowalski’s, not Cub.)


But more is different than the same. Food distributor Nash Finch sold off its dozen retail stores, most known as Econofoods. Rainbow Foods owner, Wisconsin-based Roundy’s, had 31 stores in 2003 but sold or closed them all to focus on its Chicago expansion. “Rainbow’s closing created a vacuum in the market,” says former General Mills exec and Wedge CEO Josh Resnik. “They took up a lot of space but had very little following.”

These departures left the region “under-grocered” in industry eyes, but that didn’t last long. For every other operator, it’s been a 20-year story of store growth and market share loss.


“The declining market share of the traditional grocer has been propped up by population growth,” explains Kevin Coupe, a national retail observer who focuses on the grocery industry at morningnewsbeat.com.


New entrants include Aldi, Hy-Vee, Trader Joe’s, Fresh Thyme, and the dollar stores Dollar Tree and Dollar General, which now compete for grocery sales. Whole Foods tripled in scale locally, Coborn’s doubled, Costco quadrupled. Walmart went from one to 27 stores, Target from seven to 55 (counting only stores with fresh grocery), and Kowalski’s and Lunds & Byerlys grew as well. Only Jerry’s Foods shrunk appreciably.

For purposes of this feature, we’re focusing on the Twin Cities-based grocery companies, examining their prospects in this convoluted market.


The Competitive Landscape

The grocery business may be integral to all our daily lives, but economically, it’s no slam dunk. It’s legendary for generating only pennies in margin on every sale. It’s the embodiment of the old saw “We make it up in volume.”


“It’s still a tough business to make money in, but it constantly attracts new entrants because everyone buys groceries,” says Resnik. “You make it on scale and efficiency, but [having] one alone makes it very tough.”


By the 1950s widespread auto ownership and suburbanization put an end to an era when Americans made frequent trips to small, differentiated stores to buy packaged goods, meats, bakery, and fish. In the 1960s and 70s, moms would do the weekly shopping at a single store. That simple market basket fractured again and now a typical shopping week can include visits to Costco for toilet paper, Trader Joe’s for wine and tiny frozen ice cream cones, The Wedge for local strawberries, and Cub for breakfast cereal and soup.

“It’s still a tough business to make money in, but it constantly attracts new entrants because everyone buys groceries.”—Josh Resnik, former CEO Wedge Co-ops

The Twin Cities is distinctive in two respects. One is the presence of numerous small member-owned food co-ops such as the Wedge, Mississippi Market, and Lakewinds, which comprise roughly 2% of local market share, says Resnik. The other factor is the enduring strength of locally owned grocery retailers, from Cub to Kowalski’s to Lunds & Byerlys (and Target perhaps, under some definitions).

In Chicago, for example, there is no dominant locally owned store. The area’s major operators, Jewel Osco and Mariano’s, are owned by Albertson’s and Kroger, respectively.


“This market is different,” says Tres Lund, president and CEO of family-owned Lund Food Holdings, which operates Lunds & Byerlys. “Amazon chose locations but didn’t open. Hy-Vee has cut back their plans.” Lund believes the loyalty of the local customer to locally owned grocers has given national operators pause.


“You have as robust an independent niche as any major market,” says Coupe.

But the market is close to being saturated, adds Andre Persaud, president/CEO retail for United Natural Foods Inc., which owns Cub.


And that’s not even counting the influence of Amazon, which is the No. 5 grocer in America, with 1.5 million (non-union; local grocery is heavily unionized) employees and $65 billion in grocery sales, up 2,000% in 20 years, says industry consultant Burt Flickinger, owner of New York-based Strategic Resource Group.


“[Amazon has] not done a good job in translating their e-commerce expertise to grocery,” adds Coupe, “but they still are stealing market share from somebody in every market.”

Though it’s not evident in the Twin Cities, the top four or five industry retailers control 80% of market share, according to Coupe. “Consolidation is the story.”


And of course, there’s the pandemic and inflation, which brought the industry a trial by fire over the last half decade. Flickinger says food retail is “still reeling” as it tries to find a stable footing going forward.


Pre-2020 e-commerce was something of a luxury. By mid-2020 it was a necessity—“a matter of survival,” says Coupe. But e-commerce platforms are loaded with overhead: The cost to build and maintain them, the labor cost built into shopping for the customer, and finally the transaction fees paid to middlemen like Instacart.


That said, “e-commerce can be profitable,” says Persaud. “That customer spends 15% to 20% more with you. It’s a sticky customer, but you have to offer them the same prices” as traditional in-person shoppers, despite the added cost of servicing them.


Persaud notes that post-pandemic Cub has seen big shifts in consumer behavior, namely, a decline in brand loyalty and a greater propensity to use digital channels to shop or plan shopping. Lund says e-commerce was up 400% during the pandemic, but has now settled back to 200%.


Also ascendant are private label products. “Aldi is 90% to 95% private label, Costco the same. They are deemphasizing branded food,” says Flickinger. “[Europe’s] Carrefour discontinued Pepsi and Frito-Lay products due to continual price increases.”

All the operators, despite different niches, have one thing in common. Growth can come only at the expense of a competitor, says Lund, and so “the No. 1 focus of every grocer is driving same-store sales.”


Walmart holds over 25% market share | Insights from Strategic Resource Group

The National Players

It’s difficult to make broad statements about the local grocery competitors and their strategies, but there are some notable headlines in the current era.


Target (23% of sales from food) launched its grocery strategy in 2010 under the helm of then-CEO Gregg Steinhafel, with the intent to generate more customer trips to stores in hopes that low-margin grocery shoppers would pick up an extra high-margin item elsewhere in the store. The strategy, known as “p-fresh,” entailed huge investments in warehousing and equipment to sustain the grocery business; it’s difficult to say if it delivered on Target’s expectations, but it’s now a core component of its business model.


Walmart (59% of sales from food) and sibling Sam’s Club have combined 25% market share locally, giving the combination the largest share in the market. Their niche is price, by and large, and they remain compelling for that reason. “Walmart churns a lot of shoppers with out-of-stocks and bad service,” says Flickinger, who is critical of the subsidies the company receives from producers and municipalities, noting that Walmart has contributed to three dozen supermarket chain bankruptcies.


Aldi has grown from zero to 49 stores in the last 20 years, but according to CSG has only 3% market share. It and Trader Joe’s compete for the price-sensitive customer who prefers a smaller-scale store. “Aldi tries to co-locate near Walmart because [Aldi is] better-run and beats them on price,” says Flickinger. Most of Aldi’s goods are private label, which helps its margins, and Aldi runs its stores with very little labor. “Aldi has blown up the labor model,” notes Resnik. “It’s low labor, high efficiency.”


Costco has 9% market share, with only eight stores but they are big stores with big sales volume. Costco is thought of as a value retailer, but its customer base skews affluent because of the size of purchases required and membership model.


Iowa-based Hy-Vee entered the Twin Cities in 2015 and now has 14 stores. Its business model is comparable to Cub’s—a large-format full-service grocer with Midwestern friendliness. Its stores are all new and offer amenities that many Cubs don’t, like restaurants. But the sense in the industry is Hy-Vee has underperformed here. It cut back growth plans for the market, saying many of the sites it had chosen were too small.


“Cub was weak in certain areas and it gave Hy-Vee an opening,” says Flickinger. “It was a rallying cry for Cub to innovate, to rebuild its business. Hy-Vee didn’t expect a competitive counterattack. Maybe the market has not been as impressed with them as they expected. They have no brand loyalty outside Iowa. I’d expect them to be a strong number two to Cub, basically replacing Rainbow.”


The segmentation of the market has in some respects made it simpler for Lunds & Byerlys and Kowalski’s than it was a generation ago, because they compete with only their niche of competitors. “[They] are not trying to compete with Walmart, because they can’t and don’t want to,” says Coupe.


The locals

Cub, Kowalski’s (pictured), and Lunds & Byerlys set the region’s distinctive local character in the national grocery biz.


KOWALSKI’S (11 metro-area stores)

The Kowalski family entered the grocery business in 1983, purchasing an underperforming Red Owl on Grand Avenue in St. Paul. “My mom and dad started us out as conventional grocers, but we couldn’t win at that game in [the present] environment,” explains CEO Kris Kowalski Christiansen.


In 2000 the family opened a larger format store in Woodbury, a template for the future. The company would subsequently grow by acquisition and organically. Kowalski’s self-funds its growth, has little debt, and reinvests its profits, says Christiansen. “We move slowly,” she continues, “stay attuned to our brand, stay in our lane. We’re small, values-oriented, quality- and service-driven, even in recessions and inflationary times.”


That innate conservatism hasn’t meant Kowalski’s has been free of mistakes. It closed an Eagan store in 2023. “Eagan made money one year in 16,” Christiansen notes. “We kept adding competitors. We saw the writing on the wall. Communities don’t always understand [seeking out] more [stores] isn’t better. Oversaturation creates casualties.” (It also closed a store in Lakeville in 2007, which had been open just two years.)


Kowalski’s is growing again, and though it’s long been east-metro centric, its eyes are on the old-money heart of the west metro. It just opened a store in the former Herberger’s space at Southdale, with another planned on a detached lot at Ridgedale. Some are skeptical that troubled regional malls are the place to be, but not Kowalski’s.

“We wanted to be in Edina. We’ll see how being part of a mall plays out,” says Christiansen, who says she sees the irony in complaining about oversaturation in Eagan and contributing to it in Edina. “We also wanted to be in Minnetonka. But it’s not a strategy to be in regional malls.”


Building out Kowalski’s new Southdale store.


Coupe is intrigued with the non-strategy, with a caveat. “Supermarkets bring traffic to malls,” he says. “I hope Kowalski’s is not paying [Southdale owner Simon] rent.”

Kowalski’s approach to growth is an amalgam of old- and new-school. “We drive around. We look at homes. We look at studies,” says Christiansen. “Our business always is a bit higher than the studies dictate.” After Ridgedale, “we’re going to hunker down and see how it goes, and keep growing organically,” says Christiansen.


Kowalski’s is proud of its family culture. COO and cousin Mike Oase explains, “We’re a civic business—all our employees and leadership have a voice in the operation.” The company sees its perishables selection—produce, meats, fish, and deli, all sourced locally—as the differentiator as it positions against Lunds & Byerlys, Whole Foods, and Cub.


LUNDS & BYERLYS (28 metro-area stores)

Lunds & Byerlys (L&B) were once competitors. Lunds had its start in 1939 on Lake Street in Uptown, while Byerly’s began in 1968 in Golden Valley. (Both stores remain open.) Byerly’s was suburban, its stores carpeted, with a distinctly fancy vibe. Lunds was more urban and traditional. Byerly’s sold to the Lund family in 1997. Lunds continued to grow by acquisition and organically and is now the largest premium grocer in the state. Both brands continued independent growth trajectories until they were merged in 2015.

L&B has been known as a conservative operator, yet CEO Russell “Tres” Lund III opened two stores in downtown Minneapolis when no other grocer would, and he is not shy trumpeting what he sees as L&B’s innovative nature. The grocer has developed 5,000 private-label SKUs, from soups to condiments, proof that private label is not just a key niche at the low end of the business. Lund also reveals many of his private labels carry inferior margins to national brands. The strategy is less to maximize return on an item than “to build out products customers can’t live without,” he says.


The industry has taken notice. “Defining and developing differentiated products, special goods, brands, produce, that’s the secret sauce for them,” says Flickinger.


L&B was one of the first locals to employ CO2 refrigeration and “dry misting” to reduce water waste in produce. Its new Highland Park store, which replaced one of the chain’s most dated stores, cut its carbon footprint substantially, the company says. Lund wants the market to see L&B as leaders, not followers.


Relationships are at the core of the model. When Target and Whole Foods could not keep basics in stock during the pandemic, L&B had them. “We had 8% more in-stocks because of supply chain relationships,” says Lund. The company owned a commercial silo full of flour for its in-house bakery when the flour panic hit in 2020. “We just went over and started to bag it,” Lund recalls.


L&B, like Cub and Kowalski’s, are union shops. And their cost of labor is growing. That’s part of why stores are no longer open 24 hours. “The rise in wages made it difficult to operate at [slow] times like that,” says Lund. “The pandemic gave us the latitude to right-size certain things.” Lund describes his stores as offering “industry-leading wages and benefits.” It’s on the StarTribune’s list of best companies to work for. Lund sees further growth as an inevitability.


“The larger you get, the more infrastructure you can afford,” Lund notes. “There are pockets where we could grow. We could grow by acquisition” by acquiring small collections of independents, as it and Kowalski’s have done in the past. If the metro area’s population growth stalls, as many predict, that factor could interfere with trajectories. Lund says he’s relatively unconcerned about oversaturation.

“We’re going to compete. There’s going to be overlap, as always, but we’re still here,” he says. “I’m having more fun than a generation ago.”


CUB (71 metro-area stores)

Cub’s history goes back to 1968, born in Stillwater as one of the nation’s original warehouse-style grocery stores, focused on a shopping experience rooted in private label (“generic” was the term then), minimal frills, and low-low prices. Cub stood for “consumers united for buying.”


Cub was bought by distributor SuperValu in 1980 and began a growth spurt that took it to many states and regions, including Chicago, Nashville, Atlanta, and Denver. But the national model collapsed for a variety of reasons, and in 2018 SuperValu sold Cub to United Natural Foods Inc. (UNFI), along with SuperValu’s grocery distribution business. UNFI planned to spin Cub off but had difficulty selling the chain. Cub now does business exclusively in Minnesota (plus one store in Freeport, IL).


Based in Eden Prairie and publicly held (UNFI does not break out results for Cub), Cub evolved its business model over time. “They were at risk from the dollar stores and Aldi,” explains Flickinger, “and have had to build in full-service components to differentiate.”

“Cub today offers more food variety but less price leadership,” adds Resnik.


The warehouse model now is embodied by Costco and Aldi, and Cub has reimagined itself as a conventional full-service grocery that competes on both value and amenities. Its new CEO is Andre Persaud, who joined UNFI in 2023 to lead Cub and smaller UNFI grocery holdings in the mid-Atlantic states.


“We’re Minnesota’s grocer,” he says. “There’s a strong emotional attachment to the deep roots, local connections, and reliability of Cub.”


CSG defines Cub’s market share as 17%, but it doesn’t include franchised stores. Factoring those in, Persaud believes Cub is the dominant grocer in the region. He says the company’s core customer are baby boomers, and he is focused on expanding Cub’s relevance to younger generations.


The Cub business that UNFI purchased from SuperValu was something of a basket case, despite the loss of Rainbow, its primary competitor. “[Former CEO Mike] Stigers and UNFI did a terrific job of turning it around,” says Flickinger. “They went through a requiem that led to a renaissance.” Cub, with its mix of corporate and franchised stores, “is the ideal combination of family owned and professionally managed. They work to be a one-stop shop for the shopper who needs that. They are more competitive on price than [L&B and Kowalski’s].”

“[Cub] went through a requiem that led to a renaissance. [it] is the ideal combination of family owned and professionally managed.”—Burt Flickinger, Strategic Resource Group

Persaud says his priorities are both tactical and strategic. “Forty percent of all sales begin with digital impressions, so we want our digital products to be the best in the business.” He says the company is working toward that.


On the strategic side, beyond reaching a new generation of shoppers, the question is what’s the best operating model for the future—franchise or owned stores? “Our franchisees are great business operators, they understand local, [while] the corporation does marketing and branding.”


Persaud says Cub is no longer for sale. “Cub is incredibly important to UNFI,” he notes; it “wouldn’t be easy to unwind. We want Cub to be an incubator to demonstrate to other UNFI [wholesale] customers.”


He says a big part of his mandate is to continue to evolve the brand—“Where do [we] want to play and win?”


Cub is growing as strategic issues are parsed. It’s opened a new store in Rochester, while its south Burnsville store is closed for a rebuild. Persaud says it will reopen with all of Cub’s cutting-edge ideas, including new hot foods, a redesigned deli, and e-commerce click and collect. It will be interesting to compare that reimagined store to one of the nearby Hy-Vees which typically appear brighter and more modern than Cub.


The Next Era with Kroger and Albertsons in Minnesota | Insights from Strategic Resource Group

The Next Era

“One of the reasons I’m so optimistic about Cub is the lack of presence of Albertson’s and Kroger,” says Persaud. The Biden administration is suing to block the proposed merger, and both Minnesota senators oppose it.


Most industry observers have a hard time imagining Minnesota will continue as an island that defies the two behemoths. And Flickinger sees the giants as bulwarks against the industry’s more rapacious entities: “Kroger is a good operator, a union shop, its people are well-paid,” he says.


Coupe thinks the Cubs and Kowalski’s of the world don’t benefit whether it’s Walmart or Kroger that wins. “Consolidation is not good for innovation,” he says. “It puts more market power in the hands of stores which don’t need it and disadvantages independents.”

Flickinger thinks eventually Kroger, Albertson’s, or a combined K/A will come knocking in Minnesota. Their play: a traditional large-format grocer like them. “I wouldn’t be surprised to see Kroger interested in Cub post-merger,” he says.

 
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