Market Economy: Supermarket and C-store Competition

Seeking to drive less, consumers are buying more meals where they buy groceries or gasoline. Supermarkets and c-stores are working hard to accelerate that shift.

By Scott Hume, Editor-in-Chief -- Restaurants & Institutions, 3/15/2008

Tesco’s Fresh & Easy Neighborhood Market stores offer sandwiches, sushi and other ready-to-eat meals.

In Sept. 2006, British supermarket operator Tesco PLC announced its intention to enter the U.S. market and to invest as much as £250 million a year to do so. If restaurant operators paid little heed then to Tesco’s potential competitive challenge, they likely have noticed now.

Just more than a year later, on Nov. 8, 2007, Tesco opened the first six Southern California locations of its designed-for-the-U.S. concept, Fresh & Easy Neighborhood Market. Part supermarket and part convenience store, Fresh & Easy stores are 10,000 square feet and offer ready-to-eat and heat-and-serve meals and snacks as well as groceries and household items. On Nov. 14, five Fresh & Easy stores opened in Las Vegas. The first four units in Arizona opened in December.

Last month, Tesco’s El Segundo, Calif.-based U.S. division announced plans to open its first 18 Northern California locations in early 2009. And the company has given no indication that it wants to confine its expansion to Western states. TNS Retail Forward, a unit of British researcher Taylor Nelson Sofres PLC, forecasts that Fresh & Easy will be among the 10 largest U.S. supermarket retailers by 2015, with annual sales of $10 billion.

For restaurants—not only quick-service restaurants (QSRs) but also casual-dining concepts—several telling numbers signal that the already tight competition for consumers’ food dollars is becoming even more fearsome. One revealing number is 50, the number of Fresh & Easy locations Tesco opened in just four months. Another is 70—the percentage of consumers who in December 2007 said that high gasoline prices were causing them to do more one-stop shopping, according to research from Schaumburg, Ill.-based The Nielsen Co.

Even more threatening for traditional foodservice, however, are the numbers 68 and 28.

Sixty-eight percent of consumers say they have purchased prepared, ready-to-eat meals from a supermarket deli, kiosk or refrigerated case in the past year, according to R&I’s 2008 New American Diner Study. And 28% of those consumers strongly agree that supermarket-purchased meals are a better value than comparable meals available at restaurants.

The C Stands for Convenience

Over a two-year period ending in May 2007, restaurant customer traffic grew by 3%. But foodservice purchases at supermarkets and c-stores rose 5% over that period, according to Port Washington, N.Y.-based The NPD Group.

Chicago-based researcher Technomic Inc. estimates that sales of prepared meals (not including beverages) by su-permarkets, c-stores, warehouse/club stores and other retail outlets topped $27 billion in 2007. That figure is slightly more than 7% of the $376.7 billion in sales the National Restaurant Association estimated for all commercial eating and drinking places in 2007, but supermarket/c-store sales represent a substantial chunk of lost revenue for restaurants.

U.S. c-stores reported total sales in 2006 of $569.4 billion, up 15% from the previous year. Some of that gain was from higher gasoline prices, but in-store sales rose 8.3% to $163.6 billion. Packaged nonalcoholic beverages accounted for 13.8% of in-store sales; foodservice (ready-to-eat foods) represented 12.1%, or nearly $20 billion, reports the Alexandria, Va.-based National Association of Convenience Stores (NACS).

Upfront Competition

Tesco is hardly the only supermarket looking to take dollars from restaurants. Austin, Texas-based Whole Foods Market is giving restaurants a double-barreled challenge with expanded prepared-foods options meant to battle restaurant takeout meals and in-store restaurants designed to keep grocery shoppers from going elsewhere for lunch or a snack.

In September, Whole Foods opened its first Market Hall prototype—targeting restaurant traffic more overtly than before—in Oakland, Calif. Grocery aisles are in the back of the store. At the front is a new dine-in concept, Market Bistro, with seating for 116 (inside and outside) and made-to-order sandwiches, salads, flatbread pizzas and other light entrées. An Asian Express island serves hot teriyaki noodle bowls and sushi (prepared in-store), and a Fresh and Wild station sells Whole Foods’ house-brand coffee, sausage sandwiches and hot pretzels. Free Wi-Fi is available throughout the store.

To entice consumers who might otherwise visit restaurants for takeout meals, Whole Foods offers prepared meals that range from freshly baked pizza and rotisserie-cooked meats to prepared sandwiches, salads and meals.

Who’s buying ready-to-eat foods from supermarkets? Just about everyone, but especially young adults. Among respondents of all age groups to the New American Diner Study, ages-18-to-26 Gen Yers and ages-27-to-41 Gen Xers were the most likely (at 72.6% and 71.1%, respectively) to say they purchased a supermarket meal in the past year.

Additionally, nearly one-third (31.5%) of Gen Y consumers and 23.1% of Gen X members say their supermarket purchases have increased in the past year. If young adults become accustomed to buying meals at supermarkets, it could be difficult for restaurants to win back their patronage.

Middle-Class Values

Wooing Gen Y will be especially difficult for restaurants because 36.8% of consumers in this age group strongly agree that supermarket meals are a better value than restaurant meals, compared with 28.1% of the total sample who strongly agree with the sentiment.

Gen Y consumers also are more likely to agree that supermarket meals are higher in quality than restaurant meals (18.1% strongly agree, compared with 14.6% of all respondents), that supermarket meals are safer (19.4% vs. 10.5%) and that supermarket employees are friendlier and better trained than are restaurant workers (18.9% vs. 10.6%)

Supermarkets score well, too, with Hispanic consumers, 37.6% of whom strongly agree that restaurant meals don’t match supermarket meals in terms of value. The Nielsen Co.’s study of demographics at California Fresh & Easy stores finds that 40% of customers are Hispanic.

Who among household-income groups sees better value in supermarket meals? It’s not low-income consumers. Among respondents with a household income of $75,000 to $99,999, 32% strongly agree that supermarket meals have a price/value edge over restaurant meals. Even among those with a household income of $100,000 or higher, 27.2% say supermarkets are a better value. At the other end, 30% of those with an income of $34,999 or less give supermarkets the value-advantage nod.

Whole, rotisserie-roasted chickens, which at one time were largely the extent of most supermarkets’ prepared-foods offerings, remain most popular with older consumers. Younger consumers—who may have less interest in or less time for cooking—are buying complete prepared meals (entrées and sides packaged together). Nearly 54% of Gen Y and Gen X respondents say they have purchased such meals in the past year. That compares with 42.2% of baby boomers (ages 42 to 60) and 33.8% of matures (age 61 and older) who say they have purchased prepared complete meals.

Supermarket sushi also is significantly more popular with Gen Y and Gen X consumers than with boomers or matures.

Beyond the "Bubba" Stereotype

Like supermarkets, c-stores see a chance to pull consumer dollars from restaurants and are pursuing that opportunity aggressively.

"We’re seeing c-stores taking foodservice much more seriously," says Tim Powell, Technomic senior manager and c-store practice leader. "That [means] bigger and better menus, and it’s also better lighting and equipment and more square feet of floor space devoted to foodservice."

C-stores’ recognition of foodservice sales’ attractive profit margins, along with competition resulting from more c-store brands in the marketplace, is driving this interest. Pay-at-the-pump gas sales also reduced the number of customers coming into many c-stores, Powell says. Coffee and sandwiches are a strong draw to time-pressed travelers.

C-stores are competing on quality and price as well as on the convenience of buying food where consumers are stopping for gas. Dallas-based 7-Eleven last month launched a campaign for its Cafe Select coffee with ads stating that the beverage is "guaranteed fresh or we’ll brew it new."

Tempting consumers to trade down from Starbucks and other coffee shops, 7-Eleven prices its coffee at about $1 for a 12-ounce cup and $1.49 for the largest cup, at 24 ounces. In February, 7-Eleven was undercutting McDonald’s new McSkillet Burrito by offering its own breakfast burrito (with sausage, egg, cheese, bell peppers and onions) plus any size coffee for $1.99, a price McDonald’s and other QSRs can’t profitably match.

7-Eleven has expanded its hot-sandwich menu for lunch and snack periods, too, with items such as the Chicken Bite, a 100%-white-meat chicken patty shaped like a hot dog. Altoona, Pa.-based Sheetz c-stores have foodservice menus that rival in size those found at most QSR and fast-casual chains. Sheetz offer its breakfast sandwiches on a biscuit, an English muffin, a bagel or a signature pretzel roll. Wawa, Pa.-based Wawa c-stores have added Hot-To-Go Bowls in varieties that include chicken teriyaki and pepper steak.

"It not just ‘Bubba’ picking up coffee," says Powell. "C-stores are getting a much wider demographic now. You’re seeing more women and young professionals." Coffee programs may have brought in these consumers initially, but the customers are returning for lunch, Powell says.

Afternoon Visits

According to The NPD Group, c-stores accounted for 54% of the increase in retail meal purchases between 2005 and 2007. But the New American Diner Study finds that 50.3% of consumers say they have purchased a c-store meal in the past year, compared with the 68% who purchased a supermarket meal.

Again, Gen Y and Gen X members are most likely to say they have increased their c-store meal purchases. However, the 24.2% of Gen Yers who say they bought more c-store meals is less than the 31.5% of that age group who say they increased their supermarket-meal purchases. This may be the result of already-high c-store patronage among young adults.

Although coffee is c-stores’ top-selling item, New American Diner Study data shows that breakfast isn’t when consumers are most likely to purchase a c-store food item. Forty-two percent of respondents say they are most likely to stop in for a midafternoon snack, and 31.9% say lunch is when they visit. About 30% say they opt to visit at breakfast.

When consumers are asked to compare QSRs and c-stores in terms of value, quality, food safety and service, c-stores don’t fare as well as supermarkets do in the same evaluation. About 17% of consumers see c-store meals as being higher in quality than comparable QSR food; 12.7% strongly agree that c-store quality is higher; 12.2% strongly agree that c-store food is safer; and 14.3% rate c-store employees as friendlier and better trained than QSR crew members.

Technomic’s Powell says quality and service are areas where c-stores still need to improve their reputation with consumers. "There’s still a stigma to c-stores, still that question of ‘Do I want to buy food at the same place I buy gasoline or antifreeze?’" he says. "And the real question for c-stores is going to be whether they can execute [in foodservice]. These are retailers, not foodservice operators."

He adds, "That said, QSRs can’t sit back and watch—there’s going to be a lot of back-and-forth battles" for consumer dollars and allegiance.