You may think you’re making the decisions at the supermarket. You’re wrong.
Americans have come a long way from the turn of the 20th century, when they bought groceries in small, locally owned stores. Today, they mostly shop for food in megacenters—10 of the largest supermarket chains, led by Wal-Mart, sell more than 80% of the food bought in the U.S.
The relationship between your supermarket and the companies that produce your food results in the selection of items you find on supermarket shelves. Companies put heavy pressure on supermarket chains to stock “category captains,” those brands sell the best—Coke, Pepsi, Cheerios, Heinz. Both the food companies and the supermarket are competing for you. They are after your loyalty to a certain brand as well as your loyalty to a particular supermarket chain. Both will entice you with an ever-increasing selection of food and lower prices. Supermarkets, today, often do have the upper hand. They ultimately control they selection of foods they buy, put on the shelves and advertise as “specials.”
The last few decades have also seen an enormous shift in how food is marketed and sold. Starting in the 1930s, major food producers dictated pricing and product placement policies by offering lucrative promotional discounts to supermarket chains. Up until then, supermarkets made money only when they sold groceries.
Realizing they could make money both by buying and selling groceries, supermarkets purchased overstock amounts of promotional products and super-deep discounts and held the excess in inventory for future sales. Logically, it would have been prudent for the food producer to stop offering such lucrative incentives to stock their brands, since it cost them money. But all the major players had entered the high-cost promotions game and no one wanted to be the first to stop and lose a critical marketing edge.
Next supermarkets began to divert promotional products to other stores they owned in different parts of the country, directly competing with food producers in the distribution chain. Traditionally promotions were offered regionally in areas where companies felt sales were lagging. With overstocking and diverting tactics the supermarkets took the marketing edge. As the supermarkets and food producers went back and forth trying to outsmart each other, they lost sight of the most important part of the marketing equation—you the customer.
Extensive promotional campaigns made for dramatic price differences in products, which made shoppers less brand loyal. If Prego spaghetti sauce was promotionally priced at 3 jars for $5, most shoppers were willing to give Prego a try even if Ragu has been their past favorite. Couponing further increased the shopper’s willingness to sample competitive brands. By the mid-90’s food companies were offering more than 300 billion grocery coupons a year with an average discount of 63 cents. To entice shoppers, many supermarket chains doubled the savings on the face value of each coupon. When price drove choice, customers realized that many brands where quite similar, and brand allegiance became less important than saving money.
To pull the customer back, big food companies started to churn out an endless array of new products, hoping to find that break-out product, like instant coffee or ready-to-eat cereal, that would capture a market. For new products to gain fans, they needed to get on the supermarket shelf. But, the market was being flooded with close to 18,000 new items each year, making competition for shelf space fierce. The supermarket chains recognized another golden opportunity for revenue and started charging fees to put new products on their shelves. Companies were now forced to pay to display new products even though 95% of new introductions failed within a few months and only 1% survived after a year.
Next came the era of the big box boys—wholesale clubs and warehouse stores. Lacking amenities and selling in bulk, these stores could undercut supermarket prices by 26%. Shoppers noticed and again switched allegiance. Then the ultimate big box entered the picture when Wal-Mart started to sell groceries. In a single decade, Wal-Mart became a food powerhouse, selling 30% of all the groceries purchased in the US. This volume gave Wal-Mart greater buying and bargaining leverage with food companies, further driving down food prices and squeezing profit margins.
To compete, supermarket chains opened superstores. Smaller chains that could not keep up size or prize began to falter. Winn-Dixie closed stores and restructured to get out of bankruptcy in 2005. Twenty-nine other supermarket chains have filed bankruptcy in the past 5 years. Can the traditional supermarket survive with Goliaths like Wal-Mart breathing down their necks? That chapter of the story is yet to be written. And, next time you go shopping, think carefully about why you are choosing a brand. Did you truly make that decision on your own?