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There’s a new trend emerging in grocery retailing: the “express” store. These are essentially small-surface grocery stores developed for cramped urban sites with high population densities. Their main distinguishing feature is that while they may be convenient, they are also a few notches above the traditional independent corner store, which tend to be characterized by very high prices, questionable quality and a limited assortment. But the new express grocery concept is also not in the same “chi chi-ness” league as small gourmet grocery stores like Pusateri’s in Toronto. As well, they’re also unlike gas station c-stores, which are dependent on automobiles and the need for gas fill-ups, but have improved immensely over the past few years to provide a wider and better selection of “I need it now” items.
The most recent visible example of the express grocery store format to come on the scene is in the United States, where British retailer Tesco is branching out with its “Fresh and Easy” concept, based on its successful Tesco Express chain back home. The United Kingdom’s largest grocery retailer started opening the doors to its first Fresh & Easy stores in early November, for a total of more than 20 today, and plans to have 50 in operation over the next year. After that, it expects to open more stores at a rate of 200 per year, concentrating on places like Las Vegas, Southern California and Phoenix. Talk about a British invasion.
You don’t have to go to Europe or south of the border to see the express grocery store concept in action, though. Nova Scotia-based Sobeys Inc., Canada’s second largest grocery chain, has already opened up a handful of Sobey’s Express stores in Ontario and Atlantic Canada. Some are in old IGA outlets that it acquired when it purchased Toronto-based Oshawa Group in 1998, and a few have opened up in new locations especially designed for the Sobeys Express format. A colleague of mine who lives in the High Park area of Toronto swears by the Sobeys Express store that opened up in an old IGA outlet on Roncesvalles Ave., a two-minute walk from his home. “If I need some particular ingredient for dinner, and I don’t already have it, it’s just a short hop to the store to get it,” he says. While the selection is limited compared to a full-service Sobeys, he usually finds what he’s looking for — and yes, it might be a few cents more to get the same box of cereal, but to my colleague the convenience is worth it.
“We’re like chameleons, blending into the area and meeting the needs of those in the neighbourhood,” says Peter Tobin, who manages the Sobeys Express Store on Toronto’s Yonge Street, just south of Bloor. He points out that the Roncesvalles store serves more families and has a larger selection of “European foods,” reflecting the large Polish community that lives in the area. His store, on the other hand, serves more condo dwellers, singles and working people quickly picking up things on the way home. “It’s designed so that people can get in and out in 10 to 15 minutes,” Tobin says. He adds that he’s willing to order in pretty much anything a customer will ask for (as an example, he points to an ice-wine jelly) on the premise that if someone goes to the trouble of requesting a product, “it will most likely sell.”
Still, analysts like Perry Caicco at CIBC World Markets, suggest that express grocery stores are “not an automatic win” for retailers. In a recent research report examining the trend, Caicco says that smaller grocery stores are more difficult to operate than their larger counterparts, “and if the selected site is anything less than perfect, they can bomb out quickly.” On the other hand, he adds, if located correctly and properly stocked to meet a neighbourhood’s specific needs, express stores can generate “immense” gross margins, as they are serving a customer who is less sensitive to price. Those rich margins, Caico says, “are critical because the cost of operating these stores can be heavy.”
The ultimate dream of a grocery store operator who wants to go big into the express store format, according to Caicco, is “to find an intersection between take-out restaurants, grocery stores and convenience stores that compels a frequent visit and drives high-margin purchases.” In an ideal world, he says chains like Fresh & Easy and Sobeys Express would “deliver the quality of a restaurant, the convenience of a c-store and the reasonable prices and selection of a grocery store.” However, this dream could quickly be a grocer’s nightmare should the express store in question end up with “the high prices of a restaurant, the selection of a c-store and the inconvenience of a grocery store.” As a result, Caicco concludes, the express store “just might be the most difficult format in the grocery store business to develop, sustain, operate and grow.”
Included among the factors to be considered in meeting the express store challenge, says Caicco, are the following: acquiring the right sites, since urban locations are very expensive and the competition for the best locations can be fierce; logistics and receiving, as small stores don’t require full cases of merchandise and have no storage space and must contend with the difficulty of unloading on streets where parking can be a nightmare; the loss of profits due to theft and spoilage, as lack of storage and high-value goods stocked in odd spaces and out of view increases the possibility that this “shrink” will be higher as a percentage of sales than conventional stores; and the need to merchandise each store differently, as there is no uniform standard that can be duplicated across an urban area given ethnicity, income levels, age demographics, and even the type of dwelling (house apartment or condo) that dominates the neighbourhood in question.
So, what is the experts’ take on Tesco’s Fresh & Easy? Well, according to U.S. retail consulting and marketing firm Retail Forward, the British grocer’s aggressive foray into the U.S. “represents a significant threat to the U.S. food retailing industry.” It says the rapid expansion will be a key factor in the concept’s success, and Retail Forward estimates that Tesco could have 500 stores and annual sales of US$4 billion by 2011, perhaps even growing to US$10 billion by 2015. This level of success would position Fresh & Easy among the top 10 supermarket retailers in the U.S. TNS Retail Forward also predicts Fresh & Easy could generate sales of US$900 per square foot per store each year, nearly twice the supermarket average. Says TNS Retail Forward Consultant Jennifer Halterman: “There is demand for this type of concept, and we expect other U.S. retailers to be watching Tesco closely for ideas on how to tap into this buoyant market.”
CIBC’s Caicco, on the other hand, is much more sober in his outlook. “Although its plans are very aggressive, and although they may be the best operators in the world, what [Tesco] is attempting is unprecedented, dangerous and difficult to conceive,” he reports. He points out that to be successful the stores would have to operate at gross margins higher than 32% and at costs lower than 25% of sales, and will need to sustain sales of at least US$12 per square foot per week, “otherwise it’s not worth the trouble.” Caicco concludes that the Fresh & Easy concept will not be uniformly successful, and predicts that by 2009 the company will “alter course” and plunge headlong into larger, more full-service grocery formats. “Ironically, it might be the economic failure of Fresh & Easy that would pose the biggest threat to existing supermarket players.”
As for Sobeys Express here in Canada, it’s hard to know exactly what the company’s plans are for the format, as calls to the grocer’s public relations officer this fall were eventually returned with a voice-mail message saying the retailer did not wish to participate in this column — even to provide details such as an updated number of outlets. (The description of Sobeys Express on the company website has woefully outdated figures, indicating there are only three in Ontario. But from what I can tell using a separate store locator feature on the website, there are at least half a dozen.)
However, there is an April news release from commercial real estate developer J.J. Barnicke that states it “will be assisting Sobeys with the development and implementation of a strategy to source up to 30 new locations in the City of Toronto for its new Urban Real Estate Initiative.” The area being considered is roughly bounded by Highway 427 on the west, Highway 401 to the north, Warden Avenue on the east and Lake Ontario to the south. The Barnicke release further says that Sobeys is looking for locations ranging in size from 5,000 square feet to 20,000 square feet in “streetfront, mixed use, strip centre and lifestyle centre formats.” It adds that Sobeys is adapting “to the various circumstances in the rapidly evolving urban Toronto market and is seeking areas of strong residential growth, neighbourhoods with medium-to-high population densities, and mixed use complexes with connections to Toronto’s subway and underground PATH system.”
More recently, in answer to a question about Sobeys Express from Desjardins Securities analyst Keith Howlett during a Dec. 14 conference call to discuss results for the second quarter ended Nov. 3, Sobeys president Bill McEwan said: “We will continue to look for opportunities to seek customers in any part of this country.” He added the company “won’t intend to stop where opportunity avails itself” in urban markets such as Toronto. “We’ll go one step at a time, one location at a time, and we see a future for it.” Spoken like someone who seems to have taken to heart CIBC analyst Caicco’s contention that the express store format is a challenging one to get right.
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