How do we determine how strong a supermarket is? Only one number matters – sales per square foot (sales area, what the customer has access to) relative to the competition. True consumer acceptance is expressed in sales per square foot.
Every market is different. The average sales per square foot will be higher in high cost of living markets. When doing a metro market study, sometimes the best place to put new locations is where there are clusters of high sales per square foot stores. Particularly high performing units of weak chains. For example I would be very interested in looking at new locations near a high performing Winn Dixie, Marsh, Ingles, Weis, Food Lion, Pick ‘N Save, Cub Foods, etc. If a weak competitor can do well, a strong competitor can do excellent. Plus you can severely damage a weak chain if you start killing off their best stores. Publix is an expert at this. They have either driven out their competition (Delhaize and Albertsons from Florida), bankrupted them (Winn Dixie and Brunos) , or scared the crap out them and forced them to merge (Harris Teeter with Kroger, BiLo-with Winn Dixie, and Delhaize with Ahold)
Used to be the rule of thumb was a store than did more than the market area average was doing well. Those doing 20% below average were struggling and lost their way.
Things have changed. Now with Walmart, Trader Joe’s and Whole Foods skewing so high, the new normal/average is 20% below average. There are some chains out there that are still doing well above average, sometimes 50% to 100% above average. Wegmans, DeMoulas Market Basket, WinCo, Crest, HEB, Publix, Costco, Woodmans, and Hy-Vee to name a few.
My rule of thumb is if you are doing at least 80% of the market average you are probably profitable and doing ok. At 70% you are struggling. At 60% and below you won’t be around much longer. In my opinion chains like Bi-Lo/ Winn Dixie, Food Lion, Save-A-Lot, and Marsh would be on death watch. When sales per square foot tanks, chains will often merge to postpone their inevitable demise. Safeway-Albertsons, Sprouts-Sunflower, Delhaize-Ahold, Bi-Lo-Winn Dixie are some recent examples. The grocery store graveyard is full of others like Penn Traffic, A&P, Grand Union, National, Haggens, and Fleming. When mediocre merges with mediocre the result is failure.
There are some exceptions to the rule. Some chains like Weis Markets and Ingles continue to be very profitable with a low sales per square foot but they survive by owning most of their own real estate and avoiding debt. Then there have been high sales per square foot chains like Fairway and Mariano’s but those were Ponzi schemes financed with debt to buy the business.
What is the perfect business model? Nobody is perfect but the key to a high sales per square foot is to make the customer feel better about themselves rather than abused. Walmart might be an exception. I’ve concluded that people who hate Walmart probably shop there more than the people who like Walmart. I could write all day long on ways to make your customers feel better about themselves. We can always buy customers but its best to do it the old fashioned way, you earn them.