How Amazon and Whole Foods Are Reinventing the Supermarket Industry
By Lauren Elkies Schram July 11, 2017 4:30 pmreprints
John Catsimatidis, the head of real estate and grocery company Red Apple Group, sounds like a realist about the future of supermarkets.
“The traditional supermarket has gone away,” Catsimatidis said. “Right now we’re acting strictly as convenience stores.”
It’s a shocking admission from one of the biggest grocers in the city’s history, but it’s the new reality. Catsimatidis has 35 remaining Gristedes and D’Agostinos, primarily in Manhattan—a number whittled down from 100 in New York City a quarter of a century ago.
Gristedes is offering prepackaged meat instead of a deli counter with a butcher, Catsimatidis told Commercial Observer. And Red Apple Group is considering transitioning into a “private label organic-type food market” and “having more perishables, less canned foods.”
Like Catsimatidis, other long-time supermarket chain operators are desperately looking for ways to tweak the old model.
“I think [Gristedes and D’Agostinos are] like yesterday’s supermarket,” said broker Richard Kave of Lee & Associates, who along with colleague Garry Steinberg recently negotiated a lease for the midrange-priced grocery store Brooklyn Harvest Market in Astoria, Queens. “They all kind of look the same and they haven’t been renewed in some time. I haven’t been in one recently that didn’t look like a 20-year-old supermarket.”
That’s evident, Kave said, in the stores’ racks, lighting, layout and larger percentage of frozen rather than fresh food.
“People want new and fresh, and I just don’t see them as having kept up with the times,” Kave said.
In an ultra-competitive field, all grocery stores have had to seriously rethink their future. And the industry’s omnipresent anxiety got turned up nationwide when tech giant Amazon announced on June 16 plans to snap up organic grocery chain Whole Foods Market—and it’s 456 U.S. stores, which will operate independently—for $13.7 billion. (The deal is still subject to regulator-approval and a shareholder’s vote from Whole Foods.) Stocks in grocery chains dropped sharply following the big reveal.
Amazon is leading the charge when it comes to diversification, (remember the days when it was just an online book retailer?) and the grocery business seems to be following the trend, all in a drive to increase profits.
Even before Amazon became a suitor, Whole Foods branched out with the rollout of the smaller, lower-priced 365 stores and a move into the restaurant business distinct from its in-store casual dining spaces.
In Atlanta, Whole Foods recently opened The Roast, a freestanding Brazilian churrasco-inspired eatery serving beer and wine on tap, adjacent to a Whole Foods store. And in Manhattan, near Bryant Park, Whole Foods opened a food hall section serving prepared food inside the grocery store—together sometimes called a “grocerant.”
“On a national scale we have full-service restaurants in over 30 locations and over 250 quick-service restaurants,” Brooke Buchanan, Whole Foods’ global vice president for communications, said in a statement emailed to CO. “Beyond the food and beverages we serve, our venues are a true gathering space for each community.”
Besides diversification, niching has become an important way for grocery owners to remain viable. Even Whole Foods has a niche—the healthful, organic goods one.
“I think the future of the supermarket industry on the retail side is specialty gourmet stores because when you have a player like Amazon with distribution through Whole Foods who will be able to price-war everyone, it’s about experience and getting products you can’t get elsewhere,” said Jason Gerbsman, a principal at Hudson and the exclusive broker for European specialty supermarket NetCost Market. “A mom-and-pop food market operator in a good location and the right demographics for their product line in an affordable rent with great customer service will absolutely survive and thrive going forward everywhere and anywhere.”
NetCost Market, with its six outer-borough stores (plus a few locations in New Jersey and Pennsylvania), is looking to expand with a rollout of 30 to 40 stores in five to seven years. The company also has an upscale grocery store called Gourmanoff in Brighton Beach, Brooklyn.
“We try to bring products to the market that people don’t know [about],” said Eduard Shnayder, the president and chief executive officer of NetCost Market. “These items you can’t find anywhere outside of our stores. These are not things you can order on Amazon.” He added that NetCost doesn’t just sell items, “we’re an experience.”
NetCost has a Staten Island hub where it imports its merchandise from Europe. That includes hundreds of types of chocolates and 30 to 40 different skews each of caviar and lox.
Ethnic markets can survive if they “have something compelling to offer,” said David Livingston, the owner of DJL Research, which provides market research and competitive intelligence for the grocery industry. On the health market side, however, “small ones have been squeezed out,” he said, although there have been “a few anomalies.”
According to a June grocery sector report from Trepp, ethnic grocery chains “will not be as susceptible in the short term to threats from Amazon, Walmart, Aldi, Lidl, etc.”
Another grocery retailer looking to expand in New York City is Brooklyn Harvest Market, a moderately priced grocer with gourmet, organic and prepared offerings, which has two locations in Williamsburg, at 25 North 5th Street and 205 Union Avenue, and its first coming to Queens, in Astoria.
Brooklyn Harvest Market recently signed a 26-year lease for a 24,036-square-foot store at the Durst Organization’s under-development Astoria megaproject, Halletts Point.
Beyond the prepared foods and produce (and the pizza oven at the outpost on North 5th Street), Brooklyn Harvest Market differentiates itself, Kave said, because its “stores are beautiful and [they] try to put themselves above the typical Key Food and C-Town, while still being more value-oriented than Whole Foods or someone of that ilk.” (Whole Foods is cheekily referred to as “Whole Paycheck” thanks to its reputation as being overpriced.)
Specialty grocers like the Indian and international market Kalustyan’s and the health-focused Foragers Market are likely to survive because they cater to ethnic groups as well as foodies looking for specific and unique products. But even these retailers are aware of the pressure and have diversified by adding dining space, or in the case of Foragers, a restaurant and a wine shop. If you create a food experience—the thinking goes—you might hook the consumer on your brand, especially if it’s a young shopper.
Bankruptcies and consolidations have shaken up the grocery industry. For example, the Great Atlantic & Pacific Tea Company (parent company of A&P, Waldbaum’s, Pathmark and The Food Emporium), filed for bankruptcy in 2010 and 2015, and Ahold and Delhaize merged in mid-2016 (Ahold Delhaize is the parent company of Stop & Shop). And the advent of online grocery stores meal kits, quick-serve food, mobile food-ordering companies and warehouse stores has left fewer supermarkets standing.
Pathmark and A&P are gone, “because they didn’t evolve and change and provide a great customer experience,” said Christopher Conlon, the chief operating officer of shopping center owner Acadia Realty Trust.
Meanwhile, in the low-cost provider sector, German-owned supermarket chain Aldi, with 20,000-square-foot stores, has launched in the U.S. with its curated experience. Nipping at its heels is international grocery player, Lidl, the high-quality, low-priced German retailer, which recently opened its first U.S. stores in Virginia, North Carolina and South Carolina.
Aldi said earlier this summer that it is investing $3.4 billion to expand to 2,500 stores nationwide by the end of 2022, which will make it the third-largest grocery store by count in the U.S. Plus it is spending $1.6 billion to remodel 1,300 stores by 2020. (The Aldi U.S. operation owns the Trader Joe’s chain.)
“We pioneered a grocery model built around value, convenience, quality and selection and now Aldi is one of America’s favorite and fastest growing retailers,” said Jason Hart, the company’s CEO, in a press release in June. “We’re growing at a time when other retailers are struggling. We are giving our customers what they want, which is more organic produce, antibiotic-free meats and fresh healthier options across the store, all at unmatched prices up to 50 percent lower than traditional grocery stores.”
Specialty food company Agata & Valentina—with markets at 1505 First Avenue between East 78th and East 79th Streets (opened in April 1993) and 64 University Place between East 10th and East 11th Streets (opened in June 2012)—has been immune to competition, according to company CEO Joe Musco. That is because of Agata & Valentina’s personalized service—customers know the butchers by name—and its heavy emphasis on produce, prepared foods and overall good quality.
“Prepared foods are our signature,” Musco said.
As has become increasingly clear in retail in general, consumers crave experiences.
“I think there’s a tremendous hunger for genuine engagement,” said Kate Newlin of Newlin Consulting, a brand consultant for retailers. “If you know the guy behind the counter or he tells you, ‘Here’s something that just came in and you might be interested in this,’ or, ‘We have a sample of this,’ that kind of personal service is tremendously important.”
For commodity products like paper towels and laundry detergent, Newlin said people can turn to the internet or shop in bulk with a monthly trip to a warehouse chain like Costco, or more regular trips to hypermarket chains like Target and Walmart.
“It’s not interesting to go up and down the aisles of ShopWell,” she said. You grab products, pack them up, bring them home, unload them, put them away, and once they are used up, you do it all over again. “It’s boring repetitive behavior.”
Warehouse clubs like Costco and Sam’s Club are “well positioned,” Livingston said.
Beyond supermarkets industry woes and the rise of e-commerce, supermarkets face threats from bodegas, convenience stores, drugstores, dollar stores and markets like the ones at Grand Central Terminal and Brookfield Place (with the Cipriani family getting in on the act with a market as part of an Upper West Side food hall).
The drugstores, “have figured out how to be more one-stop shops,” Newlin said. “You can dart in and out. That’s the value to it.”
And while shopping online would seem to be all the rage, in 2016, only a quarter of American households buy some groceries online, according to the “Digitally Engaged Food Shopper” study from Food Marketing Institute and Nielsen.
For Agata & Valentina, online sales represent only 3 to 5 percent of business, Musco said.
The number of people grocery shopping online is supposed to balloon in the next decade compelling more and more supermarkets to look at how to provide an online experience.
A company well-positioned for that growth is FreshDirect.
The New York-based online grocery delivery company last September announced that it had closed a $189 million investment round led by J.P. Morgan Asset Management in part to be used to grow into new markets. Earlier last year, FreshDirect launched FoodKick, an on-demand, mobile-first curated delivery business.
“As demand for fresh ingredients delivered to your door continues to rise, high-quality food, produce and packaged goods providers are drawing significant attention from the investment community,” said Larry Unrein, the head of J.P. Morgan Asset Management’s Private Equity Group and a Fresh Direct board member, in a news release at the time. “FreshDirect is one of the first to connect its customers with farmers and artisans at the click of a button. The company is also expanding its reach through the new mobile, on-demand offering FoodKick. By meeting the demands of the modern shopper on these two fronts, FreshDirect remains a forward thinking leader in this growing market segment.”
“In general, if we take the success story of Domino’s from the adjacent sector of fast-food and delivery, it’s probably fair to say that the winners of the future in the U.S. supermarket sector will be those that think like technology companies, rather than grocers,” said James Mullan, a senior vice president at GDR Creative Intelligence, a retail innovation consultancy. “That’s why the Amazon acquisition of Whole Foods is so daunting to so many, because few companies in the world build consumer-first technology solutions like [Amazon CEO] Jeff Bezos’ behemoth.”
While the national impact of an Amazon–Whole Foods deal is unclear, Conlon, whose open-air shopping centers have included supermarkets such as Whole Foods, Acme, Stop & Shop, ShopRite, Fresh Market and Aldi, said it serves as “an endorsement of the [brick-and-mortar] grocery business.”
And those brick-and-mortar grocery stores, done right, are continuing to crop up.
Having a supermarket was “critical” to Acadia’s Downtown Brooklyn development City Point for the every-day shopper, according to Conlon. Acadia signed Trader Joe’s on to 25,000 square feet in 2015 and the store opened last month. Trader Joe’s was Acadia’s “first pick,” Conlon said, because it has a “great private label business, which really separates them from the pack.”
Conlon noted that the tech-averse grocery markets could be in trouble in the long run.
“There are some supermarkets that are flat-footed when it comes to grocery e-commerce,” he said.
Livingston’s predictions on the winners and the losers of the future?
“Big plain vanilla grocers have no choice but to keep merging and cut out redundancies,” Livingston said.
“Fairway and others should slowly fade away. Wegmans [which is slated to break into the New York City market with a 74,000-square-foot store at the Brooklyn Navy Yard] would be a good example of a company in position to survive long term. Fairway Market has already filed for bankruptcy after appearing to do everything wrong a grocer could do—expand too fast and borrow money to do it.”
Kave said he and his Brooklyn Harvest Market client don’t anticipate the Amazon-Whole Foods deal impacting New York City that greatly. He noted that past entrants to the market—Whole Foods itself, which signed its first New York City lease in mid-1999 in Chelsea, and FreshDirect, which started its grocery delivery service in in 2002—did not kill the supermarket business.
“There’s definitely enough business for many markets,” he said.