Patrick T. Fallon/Bloomberg via Getty ImagesShoppers at a Walmart store in Los Angeles. A decade ago, Walmart (WMT) became the nation’s largest grocer. Along the way, 25 of the 29 supermarket chains that existed during that time went bankrupt. Then, the company set its sights on food’s “big three” — Kroger (KR), Supervalu (SVU), and Safeway (SWY). It undercut these competitors with lower prices in a way that couldn’t be matched.
Now, to prevent a Walmart monopoly, the grocery store industry is shrewdly transforming itself into a three-tiered hierarchy. It’s not a surefire strategy — but it may be its best chance for survival.
Of course, it also means the way you’re used to shopping for food could look drastically different in just a few years.
Organizing Along Class Lines
In the new order of food-buying, the wealthy, the middle class, and the poor will all have their respective shopping destination. These locations will be divided based on quality, value, and convenience — and it’s organized sort of like a pyramid.
Higher-end shopping: At the top of this food-buying pyramid are stores like Whole Foods Market (WFM), which focus on premium, high-margin, natural and organic products.
The nutritional quality of the food is high, and this is reflected in the higher price points. Their stores are also concentrated in urban settings, making it available (and affordable) to the highest of earners in these locales. In fact, the average domestic Whole Foods store is in a zip code with a median household income of $76,903 — nearly 50 percent higher than the national median household income.
Middle-of-the-road shopping: At the large middle of this food-buying pyramid are rapidly growing chains like Trader Joe’s and Aldi’s. (An interesting aside: These two chains were founded by brothers who ultimately went their separate ways over the decision of whether or not to sell cigarettes.)
At these stores there are deals on fresh produce (usually pre-bagged, to increase checkout speed and reduce waste). But most of the deals are in the centers of the stores, with processed foods.
These stores also employ savvy operational tactics to keep costs lower than your traditional grocery store. Trader Joe’s primarily relies on private-label food to keep costs low. Aldi’s, on the other hand, sells a small selection of products (97 percent less than the typical grocery store) that have high turnover (meaning they’re not sitting on the shelf for months, left to expire). Aldi’s also staffs a small number of employees at a time (three to four per shift, according to one source), also to keep operational costs to a bare minimum. Both of these strategies enable Trader Joe’s and Aldi’s to pass along the savings to their customers.
Lower-end shopping: Lastly, at the bottom of the food-buying pyramid is the growing trend of convenience-store food-buying.
The goal of companies in this realm is to take advantage of last-minute meal shopping when the wallet is already out. Food companies like Tyson Foods (TSN) and Hormel Foods (HRL) are trying to get customers popping into a store like 7-Eleven on their way home from work (to fill up on gas — or to buy a few liters of soda) to add their dinner to that swift purchase.
Convenience stores are already experimenting with these ready-to-eat or microwavable dishes. The food choices aren’t necessarily what you’d think — it’s more appetizing than a hot dog that’s been spinning all day. We’re talking about food an exhausted working mother would be happy to bring home to her children. As described by a recent Bloomberg Businessweek article, “think chicken nuggets or … flatbread ham sandwich.”
These moves are all to catch the tailwinds of the growth in convenience-store spending: From 2008 through 2013, convenience-store sales grew 5.2 percent per year, according to IBISWorld. Grocery stores, meanwhile, saw sales drop 0.4 percent annually.
What It Means for Shoppers
Of course, these changes aren’t going to happen overnight. They might not even happen at all (after all, the nutritional quality of food gets worse as you move down the food-buying pyramid — something politicians will eventually take notice of).
But unless you’re buying your food directly from a farmer, you will see big changes in the way you buy food. And, if the changes currently taking shape (as a way to combat Walmart’s encroaching into the grocery industry) come to pass, it will ultimately mean much lower prices.
Motley Fool contributor Adam Wiederman has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Whole Foods Market. John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors.