April, 1999

From the Editor

Beyond Specialty Food Stores

The most important news item with implications for the specialty food industry isn’t the latest cuisine trend from Paris. The news is about toys, more specifically about Toys R Us, which, according to The NPD Group, a Port Washington, NY-based market research firm, in 1998 was dethroned as the nation’s largest toy vendor.

Perhaps more important than seeing this “category killer” dethroned is the news of who has surpassed the company that has been the nation’s largest toy retailer for well over a decade – the new king of toys: Wal-Mart.

There is a lesson here about product specialization that the specialty food industry needs to pay careful attention to.

In Chicago this past March, the National Association for the Specialty Food Trade, NASFT, sponsored its new Chicago show. It was a stunning success. The aisles were literally jammed during many hours. The exhibitors were, by and large, quite pleased.

Now to some extent, this was because the exhibitors were a self-selected lot. Most were looking to either sell direct to small retailers or to pick up smaller Midwestern distributors. The show offered many opportunities for this type of exhibitor to profit. Those whom were looking strictly to sell to large national chains for the most part did not exhibit. As such the show was very profitable for most exhibitors, and the attendees met many vendors who not only had interesting products, but vendors who wanted to sell to the smaller guy.

One of the most significant observations about the attendees at the show – and about the way Americans now buy specialty food – is to note that all the attendees sold specialty foods but precious few were actually specialty food stores. There were drug stores, liquor stores, clothing stores, cafes, retailers of every permutation imaginable – but for most of these retailers, specialty foods are an adjunct to something else.

Today many Americans live within a few miles of dozens of sources of specialty foods and buy such foods frequently. Yet, very possibly, there are no specialty food stores nearby or, if there are, theses consumers don’t ever shop at them.

Which brings us back to Toys R Us and Wal-Mart. Wal-Mart has gained market share in the toy business for three principle reasons: First, as a general merchandise retailer Wal-Mart simply offers more convenience. Other than at Christmas time, most people rarely need to buy more than one or two toys at a time. As such it is inconvenient to have to go to a specialized store to get a single toy. It is far more convenient to pick one up while one is shopping for something else or to, at least, go to a venue where one knows one can purchase many items, not just the toy.

Second, Wal-Mart became far more price competitive on toys. Toys R Us always trumped because of selection, but pricing was never its strong suit. For a long time Toys R Us relied on a strategy of selling Pampers dirt cheap, counting on little children to persuade the parents, who came to buy Pampers, to buy some toys at normal mark-ups. With toys being its only business, Toys R Us has found it difficult to discount as much as Wal-Mart and others who have multiple revenue sources.

Finally, the toy market has shifted with younger and younger children demanding electronic games and other items that cross over between toys and consumer electronics.

Of course, this precise pattern is readily evident in specialty foods. Small gourmet stores are losing market share to more general retailers for the same reasons as mentioned above. First of all, these other retailers are simply more convenient. One rarely needs more than a couple of specialty food items at a time, and it is inconvenient to have to make a special trip to pick them up.

Second, the traditional specialty food store has trouble competing on price. Partly this is because of the better buying power of larger retailers but, even more, it is because multi-line retailers can use specialty foods to attract traffic, establish image, etc. and can get their profit dollars on other lines.

Finally, specialty foods have changed. Instead of an elite product line catering to a tiny portion of the population, today specialty foods of some type or other – ethnic, natural, kosher, gourmet, etc. – are found in virtually all homes, thus blurring the line between specialty foods and mass market items.

All this leaves the traditional specialty food store in a quandary. It is indeed difficult to compete with retailers that are more convenient, don’t need to make a living off the product and are positioned to sell the items at issue.

The edge specialty food stores have, of course, is expertise. When my bag didn’t make it into Chicago I ran over to Marshall’s, the discount clothing chain, to pick up some necessities. I could have also picked up a large range of specialty foods as the store had a substantial display but nobody at the store could help or advise with what I should buy. In fact, nobody could describe the products at all.

Still, this is a sharp edge but a tough one to maintain. After all, it might lead consumers to visit specialty stores, get advice, and perhaps even make an initial purchase. But, surely, repeat sales will often go to retailers selling the product less expensively.

Besides, the dirty little secret of the industry is that service in many specialty food stores is abysmal. Sure there are those great stores with knowledgeable and articulate owners and associates anxious to share their love of fine food with consumers. There are also plenty that condescend to customers and ignore customers.

Perishables are another answer. All the greats – West Point Market, Balducci’s, etc. have substantial perishable operations. In some ways these departments have become the distinguishing factor between the committed and the uncommitted. Those unable or unwilling to invest in the challenging and often expensive world of perishable handling who are hoping, instead, to make a living selling glass jars, simply don’t have a bright future.

Of course for the trade at large, the growth of specialty foods into non-traditional venues is a chance to expose product to consumers who never would have journeyed to a specialty food store. The benefits for manufacturers and importers are obvious. In time, however, independent specialty food retailers – at least those that are heavily committed to the business – may benefit as well. After all, a certain percentage of those exposed to specialty foods at a store such as Marshall’s – or Wal-Mart – are bound to get interested and to search out specialized stores with better service and larger selections. If so, we can all be winners in a very competitive market.  FDM