Tuesday, June 09, 2009

Supermarket Differentiation

Business Week has an article about supermarkets trying to differentiate themselves given the low margins in the business and intense competition for the roughly 10% of consumers who do switch supermarkets each year. Here's an excerpt:

"Today's newly frugal consumers are cranking up the pressure on retailers to innovate. Margins in the $547.1 billion market averaged just 1.84% nationally in 2008, according to the Food Marketing Institute. Though an average grocery store has 46,852 items, the sector's big chains also stock pretty much the same brand-name goods. So with little room to further cut prices or wow consumers with unique products, food retailers are seeking out new trends and technology that might differentiate them from competitors."

The article goes on to examine some of the innovations that have been introduced by various supermarkets around the country. However, the author fails to highlight one key problem facing the supermarket industry. Most of the attempts to differentiate can easily be imitated. After all, many innovations and improvements have taken place in the industry over the past several decades, yet margins remain paper thin. Why? In part, supermarkets cannot fatten their margins because it's difficult to sustain differentiation; most innovations are easily copied in this industry. Of course, a few supermarkets have differentiated in the premium segment of the market (Whole Foods, for instance), but most mainstream supermarkets remain in an intensely competitive space.

In any industry, the challenge is to build a sustainable and defensible competitive advantage through strategies that are inimitable. Unfortunately, some industries lend themselves to such differentiation attempts more easily than others (for instance, some industries involve innovation that can be defended through intellectual property laws).


Julie & Mike said...

Having read recently a lot of Michael Pollan's work and also an article on Sysco in Fortune magazine, I think it is a shame that food is considered an industry containing "products" that have to wow the consumer. [Can you say Nerds Ropes?!] I wonder if Safeway plans to reduce its offering of processed food to help its employees have a healthier lifestyle? They might reduce health care costs for more than just their employees. Most grocery stores have a pitifully small selection of produce, and an even smaller selection of "fresh" produce, Whole Foods included. I'm glad to see gardens making a comeback, even if it is high gas and food prices driving it. I have a great deal of sorrow bordering on shame for I grew up in suburbia where we didn't eat the fruit off of our plum, peach, and tangerine trees because food comes from THE STORE. The fruit was merely a nuisance.

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