Competition in North Carolina

Competition in North Carolina
June 25, 2018 No Comments Blog Richard Kochersperger
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Kroger closings in Raleigh-Durham highlight competitive flux

Move consolidates business in the region, while bolstering position against hard discounters

Russell Redman 1 | Jun 22, 2018

The Kroger Co.’s decision to pull its namesake banner from the Raleigh-Durham, N.C., market reflects a situation playing out elsewhere across the country, industry observers say.

Grappling with the expansion of hard discounters, a boom in online shopping and delivery, the entry of strong brick-and-mortar competitors and the growing grocery prowess of Amazon, conventional supermarket operators are taking a closer look at their store counts in various markets to determine their feasibility. And for Cincinnati-based Kroger Co., a smaller physical presence in a crowded market like Raleigh-Durham made sense, observers said.

Earlier this month, The Kroger Co. announced that it was closing 14 Kroger stores in the Raleigh-Durham area effective Aug. 14. Jerry Clontz, president of the Kroger Mid-Atlantic division, described the market as “overstored.”

“We have not been able to grow our business the way we would like in this market,” Clontz noted, adding, “The retail environment is challenging and changing in Raleigh-Durham.”

Eight of those locations are being sold to Matthews, N.C.-based upscale grocer Harris Teeter, a Kroger Co. subsidiary, which will remodel the stores to its banner. Food Lion also is acquiring one location, and Kroger said it’s seeking buyers for the remaining stores.

“It’s a good business decision they’re making. They’re not really exiting that market; they’re consolidating. They’re just changing the banner from Kroger to Harris Teeter so there’s more uniformity throughout the state,” said David Livingston, managing partner of Milwaukee-based DJL Research, which specializes in supermarket site analysis.

“Some of the stores Kroger is closing are older, low-volume stores that were underperforming. And with the new competition that’s moving in, it really doesn’t make sense to extend the leases on them,” he explained. “That’s no different than what they’d do in any other market they’re in.”

Kroger’s move in Raleigh-Durham is twofold: to rationalize its locations in that market and bolster its position against hard-discount players, according to Bill Bishop, chief architect at Brick Meets Click, a Barrington, Ill.-based strategic advisory firm focusing on the grocery sector.

“One, Harris Teeter does very well in those markets, whereas Kroger has not done so well. So the shift in resources from Kroger to Harris Teeter is a wise thing,” Bishop said. “Second, this whole area is kind of the epicenter of the development of the new Lidl brand. And I think it’s safe to say that all of the more astute supermarket chains are shy of Lidl, whose prices are so low. The strength of Harris Teeter gives Kroger a little more insulation. Harris Teeter will hold up better than Kroger in light of the Lidl competition.”

Indeed, supermarket chains in the Raleigh-Durham market have felt the impact of Lidl and fellow hard discounter Aldi, an analysis by New York-based Earnest Research shows.

Based on customer transaction data from January 2016 to May 2018, Earnest reported that grocery market share in the Raleigh core-based statistical area (CBSA) rose 1.7% for Aldi and 1.3% for Lidl. That compared with gains of 0.9% for Food Lion and 0.7% for Whole Foods Market and declines of 1.9% for Kroger, 1.6% for Harris Teeter and 0.9% for Trader Joe’s.

Kroger’s market share in the Durham-Chapel Hill CBSA also fell during that time span, down 5%, Earnest said. Whole Foods saw a 2.2% share decline. Chains adding share included Food Lion (+2.9%), Harris Teeter (+1.9%), Trader Joe’s (+1.6%) and Aldi (+0.9%).

Other grocery and food retailers in the Raleigh-Durham area include Walmart, Costco, Sam’s Club, Lowes Foods, BJ’s Wholesale Club, Target, Publix, The Fresh Market, Sprouts Farmers Market, Dollar General, Dollar Tree and Family Dollar, among others.

Given the busy retail grocery playing field, a shakeout isn’t surprising, according to DJL’s Livingston.

“It might be a little overstored, with the growth of online shopping and with Publix moving up from the south and Wegmans coming down from the north,” he said. “But the market should balance itself out. Some stores will be gone and others consolidated.”

Other markets likely to see store consolidation include Oklahoma City, Dallas and Florida, Livingston said.

“The Eastern seaboard is particularly vulnerable. I think that over the next five years, we might see 500 stores close between Key West and New Jersey,” he added. “There are a lot of ineffectual retailers — the Winn-Dixie/Bi-Lo group, Food Lion, Earth Fare, Piggly Wigglys and Supervalu’s Farm Fresh stores in Virginia. It’s just inevitable that there will be a lot of store closings. There’s not room for a lot of growth with online shopping plus well-capitalized players like Publix and Wegmans coming in. Mediocre, plain-vanilla supermarkets are going to be pushed out of the way.”

At the same time, the migration to online shopping will chip away at brick-and-mortar grocery sales, according to Brick Meets Click’s Bishop.

“We can expect more of this to happen. At minimum, the growth of online grocery shopping reduces the demand and sales per square foot of grocery stores,” he said. “So that eventually will mean some stores closing or some withdrawals from the market.”

Perhaps the bigger threat to conventional supermarkets, Bishop said, is the growing U.S. presence of German chains Aldi and Lidl, whose deep-discount pricing and private-label offerings have been a hit with American shoppers. Aldi plans to boost its store count from about 1,800 now to 2,500 by the end of 2022. And Lidl, despite having just 53 U.S. stores currently, has reiterated its commitment to expand in the U.S. and is fine-tuning its strategy.

“One thing we don’t really know yet is what happens when Aldi and Lidl are competing at the same time in a U.S. market. In the United Kingdom, that has resulted in some very substantial market share increases for hard discounters at the expense of supermarkets. Certainly, Kroger is well-aware of that,” Bishop said. “I think you’re going to see the hard discounters get significantly more aggressive.”

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