Treasure Aisles
Supermarkets are moving quickly and seriously to capture food-away-from-home spending.
By Scott Hume, Executive Managing Editor -- Restaurants & Institutions, 2/1/2006
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When Alan Powers shops for food, he shops at Wegmans. A 29-year-old software engineer in Rochester, N.Y., Powers is a loyal, enthusiastic supporter of the 90-year-old, locally based supermarket chain. So when in 2002 Wegmans opened Tastings, a 114-seat white-tablecloth restaurant adjacent to its supermarket in nearby Pittsford, N.Y., Powers, a frequent restaurant diner, was an early visitor.
He admits to initially having “some doubts that you could have a memorable fine-dining experience in a place so closely tied to mundane grocery shopping” but says his meals at Tastings only strengthened his already high opinion of the Wegmans brand. “It was somewhat a surprise, but that store had always carried its share of luxury food items, so the restaurant was not completely out of character.”
Wegmans’ gamble on Tastings—where dinner entrées include grilled rosemary-and-balsamic-marinated pork tenderloin with caramelized apples, citrus-braised fennel and figs, and potato purée for $19—is unusual, but the supermarket industry’s interest in foodservice is not, and its competitive drive to take business from restaurants goes far beyond rotisserie-chicken take-home meals or Starbucks kiosks.
In addition to expanding prepared-meal offerings, traditional supermarkets including Wegmans and upscale chains such as Wild Oats Natural Marketplace and Whole Foods Markets are setting aside floor space for in-market cafes, sushi bars and full-service restaurants with menus that rival the sophistication, quality and pricing of fast-casual and casual-dining fare.
The motivations are the same needs for differentiation, expanded customer service and brand enhancement that have led department stores—such as Seattle-based retailer Nordstrom, which operates coffee bars and even full-service Nordstrom Grill restaurants in its stores—to give up floor space to foodservice. And grocery chains are equally serious about exploring the opportunities.
Culinary-school-trained and restaurant-seasoned chefs have been hired by supermarkets to oversee food preparation, while chain-restaurant veterans are creating menus. Andre Halston, who has been executive chef for the Champps Restaurant & Bar and La Madeleine chains, is corporate executive chef for Boulder, Colo.-based Wild Oats Natural Marketplace; David Sonzogni, previously vice president of culinary services for Plano, Texas-based Bennigan’s Grill & Tavern, is director of foodservice for Dallas-based Central Market, which includes Cafe on the Run takeout departments in its seven stores and full-service Central Market Cafe restaurants in two Austin, Texas, locations.
Beyond viewing foodservice as an ancillary amenity—like floral and greeting-card departments—many chains see the potential for attracting incremental revenue and customers. That’s why Warrensville Heights, Ohio-based Heinen’s Fine Foods promotes the cafes it operates in eight of its 18 Cleveland-area supermarkets as “A place you’ll want to visit even when you don’t have shopping to do.”
“The sky truly is the limit,” Halston says of foodservice potential at Wild Oats, which recently added an extensive line of toasted sandwiches and is expanding creation of sushi bars in its 113 markets (which also operate under the names Henry’s Farmers Market, Sun Harvest and Capers Community Market). “There aren’t a lot of sushi restaurants in Little Rock, Ark.; we’re doing $10,000 a week in sushi there.”
Wild Oats’ prepared-foods sections offer meals (most often dinners) for shoppers, but they are intended as restaurant replacements as well, Halston says, nabbing dollars shoppers might spend at a fast-casual concept in the shopping center before going home. Foods such as toasted panini draw lunch customers who like the ample parking and who otherwise are not grocery shopping, he says.
“If there’s a disadvantage for us, it’s that you’re still in a grocery store; there are shopping carts around,” Halston says. “But every restaurant knows that freshness is extremely important to consumers, and when it comes to fresh, you can’t touch me.”
The Supercenter Challenge
The division between supermarkets’ focus on food to be prepared and eaten at home and restaurants’ attention to food away from home already had been weakened by 2001. But in that year, Wal-Mart Stores became the largest U.S. grocer, and traditional supermarkets have scrambled to stay competitive, if not grow. Foodservice—self-operated or in partnership with outside restaurant brands—is one of the grocery industry’s survival tactics.
Traditional grocery stores (those for which food generates at least 65% of total sales) accounted for 89.6% of U.S. consumers’ grocery purchases in 1988, according to Barrington, Ill.-based Willard Bishop Consulting (WBC). That share had plummeted to 56.3% in 2003, and WBC projects it will decline to 49% by 2008. Nontraditional formats—including supercenters such as Wal-Mart and wholesale clubs such as Costco and Sam’s Club—increased their share of grocery sales from 7.9% in 1988 to 31.3% in 2003; WBC forecasts it hitting 39% by 2008.
“Fierce competition and the blurring of retail channels have dramatically altered the marketplace,” says Todd Hultquist, senior manager of media relations for Washington, D.C.-based food retailer and wholesaler trade association Food Marketing Institute (FMI). “Consumers now have more choices than ever before and an abundant variety of products to select from.
“Warehouse clubs and limited-assortment stores are the fastest-growing formats in the United States. Drugstores carry more food products; convenience stores offer more perishables and prepared foods,” he says. “Combine these trends with Americans’ desire to eat out more and cook less and you have the most competitive food retail environment ever.”
Given that scenario, plus traditional grocery stores’ frighteningly thin average profit margin (0.88% in 2004 though projected to have inched up to 1.16% in 2005, according to FMI), it’s not surprising that FMI research finds 45% of retail food stores now have made room for sit-down eating areas (the same percentage that have in-store bank branches or kiosks).
“The addition of cafes and upgrading of foodservice operations clearly is an attempt at differentiation in a highly competitive marketplace,” Hultquist says. “Not long ago [prepared foods] operated out of the deli and meat department in the back of the store. Today you likely find the prepared-foods area in the front of the store, managed by trained chefs and foodservice professionals and offering a wide assortment of meal solutions: sushi, grilled panini, stir-fry combos, kebabs, made-to-order pizza and so on.
“The numbers are still coming in, but clearly many retailers see great potential with in-store foodservice.”
That potential is based in part on the trust shoppers have in supermarkets, especially in the key area of food safety. FMI asked consumers where they think food-safety problems are most likely to occur. Food processing or manufacturing facilities had the most fingers pointed at them (30%), but restaurants were second at 20%; supermarkets were viewed as the top culprits for only 5% of respondents.
Plumbing the Potential
In addition to boosting revenue, standalone foodservice concepts may offer even greater potential for enhancing a supermarket’s brand, as Wegmans discovered with its Tastings restaurant.
“We’ve been very successful as our customers’ supermarket of choice, where they buy raw ingredients and fresh food, and we’ve been successful with our in-store cafes [the first of which opened in 1992], which are pretty much takeout operations, though some have as many as 250 seats,” says Jim Berndt, Wegmans vice president for prepared foods and deli. “Tastings seemed a natural progression. We served our customers in every way except the full-service environment, and we wanted to see if that was an opportunity.”
Nicole Wegman, director of restaurant operations and daughter of company President and CEO Danny Wegman, credits her family’s friendship with restaurateur David Bouley (Bouley, Bouley Bakery and Danube in New York City) with helping to create and refine the Tastings concept. “He started working with us on recipes and teaching us more about food-prep techniques,” she says. “He helped us see that there was much more we could do with food. We thought the restaurant would be the perfect place for us not only to learn but also to share with our customers.”
Tastings is a morale booster and source of pride for Wegmans employees, Berndt says. It also functions as an R&D center and a marketing tool. “All store departments—bakery, cheese, produce, floral, all of them—feel they have a stake in Tastings,” he says. “Everything that’s on the table at the restaurant—china, glassware, tableware—is available in our stores, not just the food.”
Wegmans tries to keep the connection between restaurant and market from being hard sell, but diner Alan Powers wasn’t put off by it. “Dining there has introduced me to new ingredients carried in the store,” which provided “new things to experiment with at home,” he says.
That, says Berndt, is one of the great benefits. “Synergies with the market are overwhelming. The restaurant showcases a lot of the unique foods we offer, and sometimes people don’t know what to do with those products,” he says. “We have over 450 types of cheese and unless you taste them all you’re not going to know about them. So we have cheese courses in the restaurant that introduce them to customers.”
The same is true of day-boat haddock (currently served in chowder) and seafood such as Prince Edward Island mussels and Thai shrimp. “Once guests taste that in the restaurant and realize it’s available in the market next door, it makes the whole Wegmans experience stronger,” Berndt says.
If diners mention that they liked certain sauces on entrées, servers are encouraged to point out that they are available in the market. “There’s a lot of back and forth between restaurant and market,” says Berndt. “A cherry-Armagnac ice cream that was developed in the restaurant is now available in store freezer cases.”
Breakfast, Sushi, Burritos and More
Byerly’s Minnesota Grille restaurants began in 1969 as a convenience for shoppers at Byerly’s supermarkets in Minnesota, serving quick breakfasts and lunches. But they have evolved into full-menu, full-service, all-day concepts that provide differentiation and a competitive edge, says John Pazahanik, senior vice president of business development and brand management for Edina, Minn.-based Lund Food Holdings, parent of the Byerly’s and Lunds supermarket chains.
Menus at the seven in-store Byerly’s Minnesota Grille locations make clear that the lemon-dill chicken breast served is the Chef’s Market chicken available in the supermarket, for example, but aren’t heavy on connecting the two businesses.
That other grocery companies recently have opted to follow Lund’s lead in incorporating foodservices into their stores doesn’t surprise him, Pazahanik says. “Everybody’s reading the same data [on supermarkets’ declining share of food purchases] that I am,” he says. “And companies are making some interesting moves. I think Whole Foods Markets has done a great job in some of their newer stores.”
With its emphasis on organic and natural foods, Whole Foods has been the focus of grocery-industry attention since its first store opened in Austin, Texas, in 1980. It now operates 181 locations. From the beginning it was strong on offering upscale prepared foods, primarily for takeout (although many older stores have some seating for in-store dining), but last year’s opening of a 59,000-square-foot store in New York City’s Time Warner Center signaled its intentions to devote more floor space to foodservice.
A 248-seat cafe sits at the heart of the Time Warner unit, part of what Northeast Region President David Lannon calls Whole Foods’ intention to provide “an engaging shopping experience” for customers. Philadelphia-based Genji Sushi Express oversees the sushi department—as it does at nearly 70 other Whole Foods locations in 14 eastern states and Washington, D.C.—but the Time Warner store’s sushi bar has special amenities, such as stools wrapped in nori seaweed.
A 55,000-square-foot Whole Foods that opened last December in Austin boasts a full-service seafood restaurant as well as an organic salad bar. A smaller store (35,000 square feet) opened in February 2005 in Thousand Oaks, Calif., doesn’t have restaurant space but the company is testing a build-your-own-burrito bar along with sushi, oven-baked pizza and a meat-carving station for fresh sandwiches.
FMI’s Hultquist says its research suggests the supermarket foodservice trend will continue but possibly not accelerate. “Successful foodservice departments, particularly those with in-store seating, require substantial investments to cover marketing and merchandising, labor, selling and dining space, and food,” he says. “There is no simple one-size-fits-all solution with our increasingly diverse and demanding customer base, so food retail companies are carefully researching and watching what works or doesn’t work in their stores as well as in competitors’.”
Tough Times
The competitive pressures posed by supercenters such as Wal-Mart Stores spur many traditional grocery companies to explore foodservice options. But those pressures also can reduce investment capital.
In April 2004, Indianapolis-based Marsh Supermarkets opened Trios Di Tuscanos (r.), a freestanding fast-casual restaurant with a Mediterranean-influenced menu. Operated by contractor Crystal Food Services—a Marsh subsidiary—the restaurant is in Noblesville, Ind., near one of Marsh’s upscale “lifestyle format” markets.
Checks average $7 to $8 for dishes that range from entrée salads, pizzas and sandwiches to pasta and rotisserie chicken.
Any consideration of expanding the concept now is on hold, however. In November 2005, family-owned Marsh announced a $3.4 million loss for its second fiscal quarter and said it has retained Merrill Lynch to explore strategic alternatives, including possible sale of the company.
Marsh isn’t the only grocer having trouble. Jacksonville, Fla.-based Winn-Dixie Stores filed for federal bankruptcy protection in February 2005.
Market Fare
In-market cafe and restaurant menus and prices rival those at fast-casual and casual-dining restaurants. A selection of in-store offerings:
Cafe on the Run (Central Market)
- Coriander-crusted salmon, grilled vegetables, rosemary potatoes and mini-baguettes ($13.99 for two)
- Turkey tikka masala with lemon-scented basmati rice, garden-vegetable salad with lemon vinaigrette and whole-wheat dinner rolls ($13.99 for two)
Heinen’s Café (Heinen’s Fine Foods)
- Grilled turkey, Gruyère cheese and asparagus panini on Tuscan baguette ($5.99)
Minnesota Grille (Byerly’s/Lunds)
- Cinnamon-bread French toast ($4.59/$4.99)
- Charbroiled lemon-garlic chicken breast with pesto mayo, lettuce, tomato and red onion on toasted focaccia with pickle slice ($7.99)
- Charbroiled dry-aged prime sirloin with baked potato and vegetable ($12.99)
- Shanghai Circus (Byerly’s/Lunds)
- Chicken pot stickers ($2.69 for three; $3.99 for five)
- Pad Thai: rice noodles, fresh lemon, basil, eggs, sprouts and peanuts ($4.99 lunch; $5.99 dinner; $19.95 for three-to-four-serving family meal)
Tastings (Wegmans, r.)
East Coast Oyster Flight: mango-lime vinegar, ponzu-marinated and glazed (hot) with crab ($6.50)- Pan-roasted day-boat scallops with zucchini, yellow, butternut and acorn squash and carrot-truffle emulsion ($22)
- Greek Turkey Panini with artichoke hearts, roasted red bell pepper, garlic, spinach and feta cheese ($8)
Wild Oats Natural Marketplace
- Grilled zucchini, yellow squash and portobello mushroom with provolone cheese and chipotle pesto on toasted Swiss focaccia roll ($5.99)
- Chicken Meatball Hoagie: chicken meatball slices, provolone and sun-dried-tomato pesto on toasted Parmesan focaccia roll ($6.49)
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