Indie Grocery Stores Beat Back the Bigs

The private, family-run Ukrop’s grocery store, started by Joe Ukrop nearly 70 years ago, has weathered the Depression and the arrival of large retail chains and big-box discounters. Yet the Richmond [Va.]-based business has managed to expand to 28 shops and is considered central Virginia’s No. 1-rated supermarket.

Ukrop’s has thrived because it has been quick to innovate and stay ahead of the curve by offering services and a product selection that its competition can’t, or won’t, beat. Ukrop’s was one of the first markets in the country to offer gourmet ready-made meals [its main kitchen cooks some 250 different items]. The independent chain also operates a central bakery that supplies its stores with thousands of high-quality baked goods [both ready-to-heat and ready-to-serve]. According to Joe’s son, Bob Ukrop, the company’s president and chief executive officer, offering a range of prepared food and extras pays off: Ukrop’s salad bar drives 2.5% of all sales, while its fried chicken accounts for 1.7% of the grocer’s business.

And several locations feature the in-store restaurant Ukrop’s Grill & Cafe. More than half of the chain’s stores have pharmacies, and a growing number are rolling out the First Market Bank, a full-service bank with crossover benefits like a points program where customers can earn $50 worth of groceries every quarter. Last year, the company earned an estimated $613 million in sales. “There’s a lot more competition out there,” says Bob Ukrop. “We used to be a traditional grocer selling ingredients, now we sell more than just ingredients.”

New Opportunities At a time when the grocery industry, known for its razor-thin margins, is being squeezed in every direction by giants such as Wal-Mart (WMT) as well as large discount warehouses such as Costco (COS), the proliferation of upscale chains such as Whole Foods (WFMI), drug stores that stock food, and mini-marts at gas stations, agile independent grocers are finding that rather than being crushed by the competition, they’re in a position to grab a successful chunk of America’s food and convenience dollars.

Thanks in large part to their ability to be flexible, introduce new offerings quickly, and engage on a more personal level with their customers, independent grocers have been able to create new opportunities where the large chains have faltered [see BusinessWeek.com, 6/3/06, "Wall Street Sours on Whole Foods"].

According to industry publication Progressive Grocer, last year total-industry grocery sales were $478.9 billion. Of that amount, the independent stores took in about $45.7 billion, less than 10% of all supermarket revenue. However, unlike independent bookstores — which are fast disappearing in the shadow of big-box competitors such as Barnes & Noble (BKS) and Borders (BGP) [see BusinessWeek.com, 6/2/05, "Indie Bookstores' Survival Stories"] — the number of small, private groceries across the country is holding steady around 8,160, while the number of large chain stores is dwindling. Slow to move on trends and hit hard by Wal-Mart and other new, heavy-handed players in the industry, the big supermarket chains have seen a wave of restructuring, consolidations, and mergers.

Niche Carving Last year, the once-humongous Southern chain Winn-Dixie (WNDXQ), based in Jacksonville, Fla., filed for bankruptcy, and shuttered hundreds of its stores, pulling out of the Midwest entirely. Faltering Boise-based national chain Albertson’s was sold off to grocery giant Supervalu (SV), based in Eden Prairie, Minn.

“Lately, grocery stores in the middle have suffered the most with a lack of differentiation,” says Lorrie Griffith, editor of The Shelby Report, an industry trade publication based in Gainesville, Ga. “Wal-Mart has had an effect on all grocery operators, and all chains and independents have suffered.” However, she says, many independents have been able to bounce back. “Those that keep customer service high and carve out a niche can be just as strong as anybody.”

Riesbeck Food Markets, a 15-store independent chain based in Columbus, Ohio, is one of the only independent grocers left standing in the 100-mile radius where it operates, after a Wal-Mart Super Center entered the picture about five years ago. Ten years ago, Richard Riesbeck, who runs the 80-year-old business that was started by his grandmother, says there were probably 10 independents and another 10 to 12 supermarkets in his area, but they’re no longer operating.

“Signature Items”"We have learned to coexist by trying to further improve on our strengths,” says Riesbeck, “but not to match them on price item for item.” While Riesbeck says that typically he can see a drop of between 20% to 25% in sales for a full six to 12 months after a Wal-Mart opens near one of his stores, business tends to rebound.

That’s because Riesbeck’s emphasizes the store’s customer service [groceries are carried to customers cars -- no tips required], cleanliness, fast checkouts, and high-quality products. “As customers’ tastes and trends have evolved, we have reacted,” he says. For instance, the company improved their perishable departments and raised the quality and standards of its produce and developed a private-label department in its butcher, deli, and bakery departments. “We have a number of what we consider signature items that we manufacture on site that our competitors can’t duplicate,” he says.

One of the things successful independents do to compete is leverage what makes them unique and reinforce that in the minds of their customers. “Local markets can create niches,” says Tim Hammonds, president and CEO of the Food Marketing Institute, a Washington [D.C.]-based industry trade group. “It’s difficult for the larger chains to duplicate that. And they can’t take on a Wal-Mart on low price but they can find a unique market niche like the perishables, or an ethnic market in order to insulate themselves better.”

Aiming Upscale Another area that independents profitably use to their advantage is their emphasis of community and customer relationships. In addition to sponsoring sports teams and charitable-giving programs, many have found innovative ways to further create a connection in a way that their larger competitors can’t or don t. For example, Gardner’s Market, a four-store specialty grocer based in Miami, supports local farmers by sponsoring a farmer’s market in front of its Pinecrest location on Sunday mornings from January to April.

Serving a specialty market is another way that independents have differentiated themselves from the big chains. Draeger’s, a three-store northern California company, caters to the upscale shopper. A veritable Epicurean center, it offers a gourmet selection of meats, cheeses, and produce, as well as a wine shop featuring over 3,000 varieties. In addition, two of Draeger’s locations feature a housewares department offering topnotch cookware from all over the world, as well as over 5,000 cookbooks. Its adjacent cooking school brings in renowned chefs [Jacques Pepin and Charlie Trotter have taught there], and its classes sell out regularly. In addition to the Bistro Cafe at its Menlo Park location, Draeger’s introduced Viognier, an upscale restaurant in its San Mateo store that has earned nods from food critics at publications including Gourmet Magazine and the The New York Times.

Says grocery veteran Joe Ancona, co-owner of Ancona’s Market, an 86-year-old independent market in Ridgefield, Conn.: “There have been an awful lot of changes in the last 50 years. There’s modern technology, but the business remains the same — basically, it’s taking care of customers. Give them what they want to buy at an honest price.” That could be the recipe for success for many independent grocers.