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It's no surprise that in a recession consumers cut back spending. The first things to go are fancy luxuries, but after all the fat is trimmed people begin to cut necessities. Inevitably, they focus on their biggest expenses: housing, health, and food.
Today's newly frugal consumers are cranking up the pressure on retailers to innovate. Margins in the $547.1 billion market averaged just 1.84% nationally in 2008, according to the Food Marketing Institute. Though an average grocery store has 46,852 items, the sector's big chains also stock pretty much the same brand-name goods.
So with little room to further cut prices or wow consumers with unique products, food retailers are seeking out new trends and technology that might differentiate them from competitors. "Grocery stores lose or gain about 10% of their customer base each year," says Neil Stern, a senior partner at Chicago-based retail consultancy McMillan Doolittle. "So the question is: Can you grab your share of new customers?"
One way a grocer can impress consumers is to get out of the way. Smart shopping carts, mobile coupons, and self-checkout lanes let consumers help themselves. They can pull up reviews on products, keep a running tab by scanning goods as they're placed in a cart, download coupons for them on cell phones, and pay without ever entering a line.
Another tool is convenience. With most people on tight schedules, fewer shoppers want to go out of their way for food. Stores such as Wal-Mart's (WMT) Marketside, Safeway's (SWY) Market, Supervalu's (SVU) Urban Fresh, and Tesco's Fresh & Easy are filling in the gaps between their bigger locations with smaller stores and stocking them with ready-made meals, basics, and extras like in-store baby-sitters. The average sale might be smaller, but the repeat business can add up.
As the purchasing power of minorities grows, grocers are increasingly attempting to accommodate their tastes. Wal-Mart's Supermercado and Publix's Sabor are examples of smaller, ethnic stores that cater to Latinos or immigrants from Asia and the Middle East. More employees are bilingual, too.
And now, there's no place for a customer to escape targeted advertising. Wal-Mart spent two years and $10 million developing Smart Network, an advanced in-store television market that can provide detailed product info and control the ads on each individual screen. The black conveyor belts at Kroger's (KR) cashier stations are being branded, too, thanks to handiwork by EnVision Marketing Group.
Meantime, Walgreen's (WAG) and Wal-Mart are testing new RFID technology. These embedded microchips let employees know when to restock empty shelves and track in-store advertising to ensure it's placed where it belongs and when it's supposed to be—to coincide with a national TV campaign, for example. A Procter & Gamble (PG) trial boosted sales nearly 20%.
Combine these advances with niche private labels, such as Supervalu's Wild Harvest Organic brand; eco-friendly stores that Kroger and Price Chopper are building; in-store restaurants now found in Whole Foods (WFMI) and Wegman's, among other chains, and it seems there might be as many kinds of stores as there are people.
But that's the point. Supermarkets may not be able to pull shoppers away from the competition by putting 2-liter sodas on sale, but convenience, green products, or a ready-to-eat meals just might do the trick. Says Stern: "Differentiation works for the retailer who can truly master it."
Joseph is an innovation and design writer for BusinessWeek.