Friday, June 16, 2017

Competition in the Food Business

A young Mark See with a customer at Sutton Place Gourmet, circa 1990.

30 years ago almost to the day, I moved to Washington DC to take a job with United States Patent and Trademark office. While living in Alexandria Virginia, I met at young man named Mark See who was working at a gourmet food store called Sutton Place Gourmet.

This was in the era before Whole Foods and other upscale eateries.  Granted, New York City had its Balducci's.  And Central New York had its Wegmans, although perhaps Wegmans wasn't quite as upscale back then as it is today.

Working in retail is a brutal business, and Mark would spend 60 hours or more a week as manager of the Alexandria store.  Sutton Place was a local chain with branches on New Mexico Avenue, Bethesda, and other locations.  It was Whole Foods before Whole Foods. They had exotic and unusual items for sale and everything was a little more expensive or a lot more expensive than the local grocery store.  At the time, I was working at the Patent Office and going to school at night to get my law degree.  So like most 20- or 30- somethings, we were very busy.  Thus, Mark would buy food and supplies at Sutton Place using his house charge.

Although he received up to a 40% discount on items he purchased at the store, it was still very expensive to shop there. They deducted his house charge from his paycheck, and on more than one occasion I was chagrined to see that his pay stub had a negative number on it.  We were living whole paycheck long before Whole Foods ever existed.

We had a discussion about this and we decided that for everyday staple items we should discover this place called Safeway.  So we made it a point one day a week visit Safeway or Giant to purchase staple items like paper towels and whatnot.  We also join the BJ's Wholesale Club as well as Costco. However I'm not sure that the Wholesale Club really helped with our spending habits, as we were tempted to buy a lot of impulse items there - and did.

Eventually, Mark got burned out, left the retail business and became a Real Estate agent.  You don't see a lot of old white-haired people working in grocery stores, even gourmet grocery stores -  nor do you see a lot of old white-haired people working in law firms other than the senior partner and he's just one guy.

Since those days, much has changed, Balducci's ended up buying out the Sutton Place chain and re-branding it.  However they have a lot more competition in the form of Whole Foods and Trader Joe's as well as ordinary grocery stores moving upscale.  Walmart got into the food business since then and is probably the largest grocery chain in the United States, today.

Along the way, our prejudices and preferences regarding grocery stores have changed.  When we lived in central New York, we loved to visit Wegmans, as their grocery store experience was akin to that of Sutton Place, although slightly cheaper.

However we begin to tire of Wegmans' high prices and atmosphere.  Everything was so dark and dramatic in there.  It began to feel a bit like we were being put on by the entire experience.  The store was set up like a racetrack, much like Ikea, so you had to go from one end to the other to get anything. And they had quite a bit of pretentious food items there including a vegetarian section that was mostly candy and cereal.  It was more than a little pretentious.

When we moved to Georgia, we started shopping at the Harris Teeter on St. Simons Island.  It was a long drive from our house to get there and while they had a great selection of upper-end foods, their prices were through the roof.  Publix, ordinarily a very well-appointed chain in Florida seem to have only one dowdy store here in Brunswick.

When the recession hit we started looking at alternatives. Winn-Dixie, a southern chain, was in the throes of reorganization and started spiffing up their stores and offering great products and outrageously low prices. Of course I realized later on they did this to put the stores up for sale, which they eventually did.  I made a little money buying their stock when it was sold to a competing chain.

The big change in our lives was when we first started shopping for food at Walmart.  The recession hit and we had to cut back on spending.  I started this blog.   We decided, one day, to go to Walmart, after a disappointing visit to Publix.   We were expecting to find expired food items and dented cans of peas - as well as the "People of WalMart" you see on YouTube.   But our prejudices were just that - prejudices, and silly ones at that.

We discovered that Wal-Mart was the largest purveyor of organic foods.  Not only that, they had a huge selection of foods, at great prices.   We found items that were also at the "gourmet" stores, but for less than half the price.  It was an eye-opening experience.   We have friends that even today will drive 20 miles out of their way to shop at Harris-Teeter, and pay double for groceries.   When you mention Wal-Mart and the new "Ghetto Gourmet" store (a "neighborhood market" at the corner of MLK and Community boulevards), they roll their eyes.  "I would never shop in such a place!" they cry.

And at the same time, these are liberal people who claim not to be racist or prejudiced.   But to shop in the same store as black people is, well, beneath them.  Limousine liberals - go figure.

Anyway, in the last few years, some weird things have been happening in the grocery business.   Prices are in free-fall.  A dozen eggs, which was over $2 a couple of years ago, is 79 cents today.  What is going on?   There is a lot of competition in the grocery business, and the competition is getting worse (or better, depending on your point of view) as more retailers enter the market.

Restaurants are even feeling the heat.  You can buy "pre-made" foods at the grocery store and bring them home to serve, for a lot less money than a restaurant meal.   Wal-Mart has a $4.99 rotisserie chicken that would feed four people (with side dishes), and comes pre-cooked.   Not only that, as we head toward recession, a lot of people are waking up and realizing that maybe using a restaurant as your kitchen is a really, really stupid idea.

Whatever the reason, sales in grocery stores are up, but prices are lower than ever.   Not only has Wal-Mart rewritten the book on grocery sales, foreign companies like Food Lion, Aldi Nord and Aldi Sud (one runs the Aldi chain, the other Trader Joe's, or maybe the other way around, I forget).   And yet another European grocer announced today they are entering the market.   The grocery business is getting cut-throat.

Against this background, Whole Foods, like Sutton Place, didn't have a chance.  The latest word is, Amazon is buying the chain, to do what, we don't know.   I think the idea of "upscale" or "luxury" grocery stores may be an idea whose time has come and gone.    Maybe there are a few people left who demand to pay 2-3 times the going rate for groceries, just so they can shop in a store and not see poor people.   But like "luxury" cars, you have to wonder whether the raison d'etra has gone by the wayside - when you can order an economy car with all the same features.

Why pay enormous sums for groceries when you can go to Wal-Mart and get them for far less?   And it is not just the "luxury" gourmet chains that are at risk, but the middle-class chains as well.  I was in Winn-Dixie the other day and called Mark and asked if we needed anything.  He told me to get hamburger buns.   They are $2 a package at Winn-Dixie.  88 cents at Wal-Mart.   I was chagrined.  But again, that's why we stopped shopping at Winn-Dixie.   The mid-level middle-class grocery stores have the most to lose in this coming retail war.

But maybe Amazon has something else in mind.  As I noted before, Wal-Mart's advantage over Amazon is that it is one of the few brick-and-mortar stores that I visit anymore.  And I visit it to get groceries (which are a very hard thing to order online - at least fresh produce, cheese, meats, and dairy) as well as prescriptions filled.   Wal-Mart also has an online shopping system like Amazon's, and offers discounted shipping to the store.   Since you go to the store anyway, why not have your items shipped there?   If they do this right (e.g., not lose your shit) they could clean up with this model.

Maybe Amazon is thinking same thing - ship your Amazon purchase to the Whole Foods, and pick it up there.   But I am not sure it was a smart move.   Unlike Wal-Mart, which is the new Sears of today (you can have your tires rotated while you buy new jeans for the kids, have your eyes examined, cash a check, eat lunch, have your hair done, pay your taxes, sign up for Obamacare, and buy groceries, all without leaving the store), Whole Foods is a niche market player, selling overpriced food to clueless yuppies who care more about impressing their neighbors in Park Slope with the logo on their grocery bag (you laugh, people used to ask for the fancy grocery bags at Sutton Place, just so they could show off to others).

The financial press argues that Kroger is where the Whole Foods customers are fleeing to.  And maybe this is true.  It fits the pattern we made when the recession hit.  We dropped the high-end grocery store and went to a mid-level store, and then finally Wal-Mart.   Wal-Mart wins in the end, not Kroger.   Whatever the new pattern will be, I suspect there will be a lot of shakeout in this industry.   You can't keep selling products for below cost - like eggs for 79 cents a dozen, at least not for long.

And this recession, I think will cause a lot of younger people to change their buying habits permanently.   Realizing that the reason they are living "paycheck-to-paycheck" has more to do with their spending habits than who is in the White House, they may make profound and permanent changes in their shopping style.   At the same time, older folks are hitting retirement age and realizing they have to trim their budgets.   Throw in a mild recession and too many players in an overheated market and, well, we'll see a pretty neat price war in the grocery business in the next few years.

And who do you think will be the last man standing?   I know where my bets are placed.