Like shoppers' budgets, grocery stores shrink

Grocery stores, like consumers' food budgets, are shrinking.

This month Wal-Mart Stores Inc. opened four pilot Marketplace stores in Arizona that are half the size of a traditional supermarket.

Supervalu-owned Jewel-Osco is testing its own small-format store in Chicago known as Urban Fresh. Safeway trialed its version in Southern California. And Whole Foods has said it is scaling down the size of its new stores.

The format has worked for some companies, such as Trader Joe's, for years. But the idea is spreading as grocers are coping with rising costs and limited capital and find themselves pressed to find more profitable formats. It's part of increasing competition with existing small stores and British company Tesco PLC, which launched its first small Fresh & Easy store about a year ago and now has nearly 100 around the West.

"It's safe to speculate that a lot of the growth in the grocery business in the years ahead is going to be focused on these small stores," said Bill Bishop, a food retailing consultant at Willard Bishop Consulting.

While the companies testing out the smaller stores wouldn't release details on their performance, for grocers the format mean lower overhead costs and fewer -- but often higher-margin -- products. For consumers, they mean quicker shopping trips to nearby stores with more tailored choices.

Gary London, 55, an economist, shops at the Fresh & Easy in San Diego's Point Loma neighborhood three or four times a week, usually after calling his wife, Ceci, 36, on the way home from work to decide what's for dinner.

Ceci London says the selection is limited -- she can't find certain cleaning supplies, for example -- but the couple likes the small packages and low prices. They estimate the prices are 30 percent below Vons, where they previously shopped.

"They don't have everything, but they have 80 percent of what you need on a daily basis," Gary London said.

"These are like the old (U.S.) neighborhood markets of 40 years ago," he said.

Experts say most grocery store trips are small ones, to pick up a few items.

Bishop estimates the small-format store can cut the average grocery trip from an average of 20 minutes to less than 10. And there's the "shopability" factor: Not everyone wants to choose from a wall of ketchup.

The small-format stores seem to have mastered the mix of high-end items with low-priced steals.

Trader Joe's for example, has long drawn people with its deals on fresh tuna or sea salts. Now Wal-Mart's new stores, which seem to be the antithesis of its ubiquitous "supercenters," are offering local produce within days of harvest and more than 200 of its wine selections sell for under $10. And many of the small stores focus on ready-to-eat prepared foods, which can be sold at a higher margin.

"We really took a lot of things the consumer is going for, although the consumer may be pausing for more value today, they are still time-starved and looking for solutions," Jeff Noddle, chairman and CEO of Supervalu told investors during a conference call to discuss its most recent quarterly earnings results.

Lisa Foster, 42, a registered nurse, hasn't shopped for groceries anywhere else since Fresh & Easy opened in her San Diego neighborhood in August. The selection is limited but that's fine with Foster -- she likes the coupons at checkout and the smaller sizes so she doesn't waste food.

"I don't really care if they don't have 500 brands of mayonnaise or 500 brands of salad dressing," she said after ringing herself up for a carton of ice cream and a $2 bottle of Chardonnay.

Fresh & Easy spokesman Brendan Wonnacott said it's a market Tesco has looked at for about 20 years.

"The main thing was to listen to what consumers felt they needed: something that is easy to get to, simple and offers everything you need at low prices," Wonnacott said.

Tesco keeps costs low with limited packaging, simple stores, tightly controlling what products it puts on its limited shelf space and using a small number of distribution centers to serve its stores, which run about 10,000 square feet.

The median supermarket size was 47,500 square feet last year, according to the Food Marketing Institute, although some run much larger.

Jewel-Osco, which puts most of its emphasis on prepared foods at its Lincoln Park site and caters to busy professionals, says the format is "just in response to some of the lifestyle needs of consumers."

But all are centered around exploiting the idea that less is more, which is increasingly important as consumers scale back on spending and limit driving, as most are based in neighborhood settings.

"The bigger stores have probably gotten themselves to the point where they are full of a sufficient fraction of merchandise and they are not growing and not producing the full margin potential, they are not profitable," Bishop said.

He said the number of areas where the big store is the ideal business model is shrinking, so companies must come up with a more viable business model.

"United Airlines took out 60 percent of their capacity," Bishop said. "Why wouldn't they (grocers) limit their capacity too?"