April/May, 2010

From the Editor

Under-Marketed Delis

When Wal-Mart first began to roll supercenters out across the country, grocers had a very specific fear: Wal-Mart wouldn’t care about making money on food.

The logic was simple. Wal-Mart made its money on general merchandise, which has a far higher profit margin than food. Wal-Mart wanted to sell food, the theory went, to increase the frequency of visits to its stores. Once consumers were there, Wal-Mart would sell them highly profitable general merchandise. In a sense, food would be a kind of advertisement for Wal-Mart, something that brings the customer through the front door — the profit would be made elsewhere.

It was not a bad theory and, although, in the end Wal-Mart was able to keep its costs low enough to present a strong pricing offer and make a profit on food, the theory’s premise — that departments focused on high-frequency shopping can contribute value beyond profits to a multi-departmental retailer — is true.

It also implies a special role for the deli/retail foodservice operation of any supermarket.
After all, dry grocery purchases can be postponed almost indefinitely, and perishable departments may require a visit weekly or twice weekly in typical suburban settings. The frequency of purchase for lunch can be daily, and if a store offers a good breakfast program, it can get both lunch and breakfast business. Add take-home for dinner or in-store dining options and the deli’s foodservice operation has the potential to bring customers into the store daily or even more frequently.

Yet supermarket deli operations are consistently under-marketed; stores are not using their best weapon in building shopping frequency and consumer loyalty.

Deli departments are often inexpensive, perhaps too inexpensive, but whatever the value, it is often hidden. Contrast a typical supermarket deli department’s low-priced items, hidden amidst a large offering, with the “Value Meal” offerings now standard at quick-service restaurants. Why do so few supermarkets offer a consistently highlighted value offering?

There is terrific quality food offered as part of the foodservice offerings at deli departments, but those excellent items tend to be lost among the wide assortment of things delis typically do. In contrast many of the fastest growing restaurant chains, such as Five Guys Burgers and Fries, focus on doing a few things really well.

It is this failure to clarify an image — be it for value or quality, expertise in a cuisine or service — that prevents most deli foodservice operations from maximizing the contribution they could make to the broader supermarket by drawing in more shoppers, more frequently.

Over the last year and half, deli foodservice has benefited from the trade-down phenomenon as consumers sought economical alternatives to restaurants. The deli department has not, however, benefited as much as it could have, because not only is its positioning not as clear as it could be, but its marketing is also neglected.

Restaurants have been doing all kinds of offers to keep business moving. It’s common for restaurants to offer nightly themed specials, such as “Build your own burger for $5 on Wednesday,” the “Bottomless pasta bowl on Monday,” etc., highly promoted events that keep interest high and attract customers. Even in supermarket delis with good foodservice programs, all you get is a lonely sign saying what the day’s special is.

If the economy begins to turn as many suspect, deli departments will pick up some business from store customers electing to purchase some convenience rather than cook everything themselves. They will, however, lose business as those who had traded down from restaurants trade back up.
And a wonderful opportunity will be lost because the supermarket deli is so often a non-descript non-entity. It has no name, no specialty, and no image. So customers can give it up without feeling they made a decision.

The problem is really at the very top of the food chain. Though retail CEOs may pay lip service to the idea that the deli’s foodservice operation is crucial for attracting customers and increasing the frequency with which the customers shop the store, they still demand profits as if those other purposes don’t matter.

As Wal-Mart’s food operation has grown, it has come to account for a larger and larger share of sales. Because food offers lower margins, the growth of food sales, though increasing dollar profits, has depressed margins for Wal-Mart. Because the Walton family owns about 40 percent of the company, it can choose to tolerate lower margins in exchange for a larger and more profitable overall business.

The question is how many supermarkets are educating their ownership as to the necessity of investing in a clear image, well marketed for their own deli operation. And to what degree do the owners understand that P&L reports from the deli are not as revealing as one would hope for they neglect to score the impact of the deli offering on the ability to attract customers to the broader store? DB