Worth the Savings?

Discount Grocery Stores

Over the past decade, grocery chains such as Aldi, Bottom-Dollar Food, No Frills, Save-A-Lot and Food Basics have experienced growth as more people look to these chains as alternatives to the higher end stores.

Savvy shoppers already know to use coupons and buy private-label brands to save money, but discount grocery chains often up the ante by selling exclusively private-label goods and are able to offer lower prices because they feature few, if any, of the departments that customers are familiar with in an average supermarket, such as in-house butchers, bakers, floral and pharmacies. Most carry the same types of goods found in a supermarket, including fresh produce, canned foods, frozen foods and good old milk and bread. At many of these stores, customers bag their own groceries (to save on labour costs), don’t accept credit cards, and some even charge customers a deposit to get a shopping cart – customers get their coin back when they return the cart, to prevent theft and save on overhead.

Even with the lack of frills, consumers continue to flock to these stores. As a result, this segment has become one of the fastest-growing in the food-retail sector.

For example, Save-A-Lot has 1,200 stores in 39 states and plans to double the company’s size over the next five years. Aldi operates over 1000 stores in 21 states and is planning for further growth; the chain recently opened 10 stores in the Houston area. Aldi opened its first US location in 1976, but it opened a small number of stores per year — 25 or so on average. However, with the growing demand for discount grocers, the company has accelerated its expansion by adding more than 250 stores within the last few years.

Officials from Aldi say their discounts amount to up to 45 percent off competitors’ private-label brands. But analysts provide a lower estimate, a discount overall of about 20 percent.

Going a step further than discount grocery stores, there are even discount grocers that sell so-called “second-rate goods” – think of dented cans, banged-up boxes, and items sold well past their sell-by date. Stores such as Grocery Outlet and other independently owned stores have grown throughout North America as more people tighten their budgets. Even with the savings that customers report (some as much as 70 percent compared to an average supermarket), there are concerns as to whether eating food in dented cans or past its sell-by date is safe. But in an article in The Atlantic, Dr. Ted Labuza, a professor of food science at the University of Minnesota, says that, “Foods can remain safe to consume for some time beyond sell-by and even use-by dates provided they are handled and stored properly.”

Other shoppers look to local farmers and international markets to save money on groceries. For instance, Your Dekalb Farmer’s Market located near Atlanta is known for selling produce, seasonings, and meat well below the price of nearby grocery stores. For those who cook a lot, saving money on these fresh items can be very important, and seasonal deals such as 16 ounces of parsley for $1 can often be found.

Some of these discount stores are owned by larger food retail outlets. For example, No Frills is owned by Canadian supermarket chain Loblaws. The first No Frills store opened in East York, Toronto in 1978 in a converted Loblaws previously slated for closure. In response to inflation and increasing food prices, the grocery chain introduced its private label line, No Name, which consists of products sold with simple yellow-and-black packaging a few months before the first No Frills location opened. Sales exceeded expectations, and the president of Loblaws at the time predicted that limited line stores such as No Frills would become a growing market. Those predictions came true, as No Frills has grown to over 200 locations throughout Canada since the first store opened.

In the Lone Star State, San Antonio based HEB has opened Joe V’s Smart Shop throughout Houston. The stores were opened throughout the Houston area shortly before Aldi made its entrance into the competitive market region. The stores feature utilitarian interiors with cement floors, basic signage and warehouse shelving. Like most discount food retailers, Joe V’s has fewer items stocked than your average grocery store. There are even self-checkout machines to cut costs even more. It’s a huge contrast to HEB’s offerings at its upscale Central Market division, which is known for selling gourmet food items and featuring events such as wine tastings and culinary schools at its locations.

Aldi’s American division also owns specialty food retailer Trader Joe’s, which is known for its private label gourmet and health foods, as well as its wildly popular Charles Shaw Wine, nicknamed “Two Buck Chuck” because of its $2 price tag in many locations.

As the traditional grocery stores have dealt with declining market share, facing stiff competition from specialty food retailers (such as Whole Foods), the discount food retail divisions of these companies have enjoyed increasing earnings.

Supervalu Inc., for instance, which owns Save-A-Lot, also owns other grocery chains such as Cub Foods, Farm Fresh, Shoppers Food & Pharmacy, Shop ‘n Save and Hornbacher’s with locations throughout the United States. However, Supervalu had to sell its other grocery chains such as Albertson’s, Acme, Shaw’s and Star Market to Cerberus Capital in January 2013 in order to raise cash. Additionally, a report for the first quarter of fiscal year 2013 citing a reduction in cash flow to $227 million, compared to $245 million in the same quarter last year has affected Supervalu’s stock prices. $59 million of Supervalu’s earnings came from the Save-A-Lot chain, and Supervalu plans on adding 40 additional Save-A-Lot stores in 2013.

Save-A-Lot has its issues as well, however, including declining market share and increased competition from discount food retailer Aldi as well as retail giant Walmart. Also, many Save-A-Lot stores are run by independent licensees and they are dealing with an increase in wholesale food prices, costs that are often handed down to the consumer. With Supervalu’s issues, and Save-A-Lot still profitable in spite of its challenges, analysts predict that Save-A-Lot could be purchased by another food retailer in the future.

Discount grocery stores must be able to distinguish themselves in the face of heavy competition. Not only are there other discount food retailers to compete with, but these stores must also compete with Walmart, Target, and even dollar stores for the consumer’s food dollars.

To seek new avenues for its own growth, Walmart has opened Walmart Market and Walmart Express locations in areas where their gargantuan Supercenters have met with resistance. Originally named Walmart Neighborhood Market, Walmart Markets are often a quarter of the size of an average Walmart Supercenter and marketed as a convenient, less hectic alternative to the larger stores while still offering lower prices that appeal to the consumer. In 2006, Walmart closed its locations in Germany, unable to face Aldi head on in Aldi’s home country. However, as the food retail sector evolves, it remains to be seen whether Aldi will continue to thrive in the US as external factors that affect food prices have an impact on the entire industry.

As millions of people have had to tighten their budgets, consumers throughout North America still have plenty of options to stretch their food budget dollars at discount grocery stores. Selling quality products at low prices without the bells and whistles of a traditional grocery store can enable families to get more for their money.