February, 1998

From the Editor

Specialty Foods: A Role Beyond Direct Profit

Are traditional supermarket chain competencies really the ones that will increase sales and profits from specialty food sales? There is real cause for doubt on this point.

It is worth thinking about these issues in light of the current drive by supermarket chains to change the distribution system for specialty foods. The industry is abuzz with discussion as a major supermarket chain has appointed a particular direct store delivery distributor as its exclusive distributor on a national basis. Other chains have wholly owned subsidiaries specifically devoted to the distribution of specialty foods. Across the country chains are experimenting with various business models, breaking out of the traditional model in which full-service distributors competed for both manufacturers and for retail business.

None of this is surprising. In a world in which competition grows ever more intense, one would be shocked if supermarket chains didn’t attempt to do the things they do so well: drive costs out of the distribution system, uniformly distribute branded product across broad geographic areas, aggressively procure on a price-oriented basis, etc.

After all, traditional supermarket strengths derive from mass buying and the economies that this system can create. Yet, logically, this poses two significant problems when thinking about specialty foods: First, the approach is focused on economy, yet specialty foods are far less sensitive to pricing than are most supermarket items. Consumers who want specialty items are willing to pay substantial premiums to have unique, quality foods. While this doesn’t mean that costs are irrelevant, it does indicate that a drive for economy is unlikely to be the key to success in the specialty food arena.

Perhaps even more problematic is that the very imperatives that drive the traditional supermarket approach foreclose even the possibility of a true specialty food. After all, specialty food is not a type of food; it is a product definition defined by idiosyncrasy. If the same product is bought en masse and distributed uniformly across the country, it starts to lose the nature of a specialty food.

Perhaps more important, the supermarket that runs its specialty food operation to minimize procurement and distribution costs is blowing the opportunity to fully utilize its specialty food offerings. The two key problems in the grocery industry today are the difficulty of distinguishing one’s store from a competitor’s store and consumer boredom with the shopping experience. The challenge for supermarket chains is to make shopping a more pleasant and even invigorating experience so that consumers will resist the Siren song of foodservice outlets and alternative retail formats such as convenience stores, warehouse clubs, etc.

In this sense, specialty foods serve a vital retail role far beyond profit. Just as fine produce and a bountiful deli can distinguish one store from another and help transform a boring shopping obligation into a sensory experience, a shrewd specialty food assortment can be the decisive characteristic in a consumer’s choice of where, and how frequently, to shop.

This is a great secret. Because produce, deli, bakery, and meat have the advantage of distinct departmental identity, it is easy to do surveys to quantify the importance of these departments. As such, countless surveys have been done crediting these departments for making a difference in where consumers shop. And doubtless they do. But what is easy to research is not always the most important, and specialty foods have unique power.

The problem with all market research is that it must be carefully interpreted. It can easily deceive people – even sophisticated business operators – into jumping on the wrong bandwagon. The reason is that very often the things that rank highest on consumer research studies are so widely recognized as important that it is difficult to gain an edge in these areas.

In effect, those top priority areas, things such as cleanliness, become the price of admission to the competition and not one’s competitive edge. If one doesn’t have clean, well-lit stores, one goes out of business, but mopping 48 times a day probably won’t give anyone an edge.

The competitive advantage – the winning edge – comes from areas that are intensely important to specific consumers, but not so generally important that every retailer does the job for every consumer. Most obviously one can see this with an area such as kosher foods.

A wide selection of kosher foods never ranks as an important consideration in selecting a shopping venue for the great masses of consumers, but it is intensely important to a certain segment of the marketplace. If a retailer succeeds in this area, the stores will gain the intense shopping loyalty of a particular market segment.

Extrapolate from this and one can easily see the enormous importance of specialty foods. Consumers each have certain key products that will help to win those shoppers’ loyalties. One consumer wants kosher product, another organic, for another it’s that favorite hot sauce or that uniquely flavored marinade.

In effect, specialty foods are micromarketing writ large. And an effective specialty food offering works not so much because of its own contribution to profit but because each specialty food is the particular magnet for the particular slice of the consumer market.

Because a store is the only one nearby that carries that brandy-peach mustard that drives Joanne crazy, the store gets her $200 a week grocery order. That is the power, and the opportunity, of specialty foods.

Of course, what this means is that a store’s specialty foods selection has to be right on target. It needs to vary regionally, change rapidly with taste and food trends, and carry unique brands and products that are not available in every store.

These are all the things that big supermarket chains are awful at. They have precious little to do with squeezing costs out of the distribution system and a lot to do with engaging food experts who are right on top of trends. These are importers and specialty food distributors.

The answer one gets depends on the question one asks. If supermarket chains focus on how they can cut costs, they will cut costs – right along with sales and profits. That is the irony of the situation.

If chains, instead, are to ask how they can use specialty foods to make their stores exciting and indispensible to individual consumers, the supermarket chains will need to worry less about cutting distribution costs and more about working with people well positioned to discover that hot, and heavenly, new Thai salad dressing.

This is the true challenge, and opportunity, in specialty food merchandising and procurement.

The winners will be those chains that don’t allow the logistics department to overwhelm the merchandising imperatives.  FDM