I mean… the prices sure don’t help…
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SOURCES
https://www.thestreet.com/retail/kroger-loses-12-billion-cpg-spending-to-rivals
https://incfact.com/company/aldi-batavia-il
https://unanswered.io/guide/is-trader-joes-doing-well-financially
https://unanswered.io/guide/is-trader-joes-doing-well-financially
https://savealot.com/newsroom/save-a-lot-releases-2025-business-and-social-impact-report
Picture sources:
The Marketing Gateway is a weekly podcast hosted by Sean in St. Louis (Sean J. Jordan, President of https://www.researchplan.com/) and featuring guests from the St. Louis area and beyond.
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TRANSCRIPT:
So, we’ve all gotta eat, right? And I have to admit that I’m intrigued by this baker I just read about in Montreal called Toledo that decided to base their logo design off the shapes formed inside their bread, this sort of twisty-turny chaos that comes from multiple layers of flaky, buttery dough forming air pockets.
You’ve got to see this logo to believe it – and if you’re listening, not watching, it’s on the show notes – they not only worked in their name but also these crazy loops and lines formed from the contours of their finished product. Honestly, I’m getting hungry just thinking about it! And that’s the point. Talk about smart branding.
And look, food marketing has long been about creating cues that lead to a desire for gratification. Nobody’s done it better than the Coca-Cola Company, creating a distinctive glass bottle that was designed to be able to be identified by touch as well as sight so that if you were, say, rooting around in the icebox at night looking for some sort of relief from your insomnia, you could locate a Coke and make it your first choice.
Krispy Kreme recently figured out that if they could slap a Pokémon on their doughnut, they could create a craving that would be hard for even casual doughnut eaters to ignore. A lemon curd-filled doughnut doesn’t sound that appealing to most people, but if Pikachu’s on there? It’s a sell-out success.
Likewise, breakfast cereals and boxed mixes and frozen foods and snack cakes all have these really appealing pictures of the food they contain inside, just begging you to pick them up off the shelf and take them home, even if the reality can never match the picture on the box.
There’s a reason they say never shop hungry, and marketers have known for decades that if they can make it look good when your ravenous eyes are searching for an antidote to your growling stomach, you’re far more persuadable than you are if your mission is just to pick up some eggs and milk.
But even with all the knowledge out there about how to get people to buy something from the supermarket, Kroger, one of the largest grocery store chains in the world and the owner of chains like Ralphs, Fred Meyer and Smith’s, has lost $12 billion in consumer spending over the last year.
Where’s that money going? Big box stores, warehouse stores and online stores – the places where what’s on the box doesn’t matter as much as the value it delivers.
And that leads me to wonder – are supermarkets on the way out? Let’s take a look at what’s really going on.
I’m Sean in St. Louis, and this is the Marketing Gateway.
The supermarket as we know it today is a retail concept that started appearing around the United States in the 1930s to combine the older grocery store concept with services such as bakeries, deli counters, refrigeration and dairy and other types of goods like softlines, hardlines and health and beauty care.
Grocery stores like the Piggly-Wiggly had already introduced self-service models that got away from the need to take a number and wait in line for someone behind a counter to serve you, and supermarkets evolved this concept into sort of a department store approach.
But one of the key aspects of supermarkets has always been a focus on low prices, and in fact research into what constitutes the first true supermarket has been complicated by the fact that many of the stores that might claim to be the true original like Alpha Beta, Ralphs, Weingarten’s, Henke & Pilot, Safeway, A&P and Kroger originally started out charging extra for the convenience of their services.
A study conducted in 1996 by the Food Marketing Institute found that the true original store was from Long Island, New York. It was called King Kullen, founded by Michael J. Cullen after he left Kroger, and focused on the philosophy of “pile it high and sell it cheap.”
Store designer Joseph Unger came up with the idea of customers putting items with prices clearly marked on them into baskets and checking out at a counter. The stores also used things like conveyor belts, easy-to-clean tile floors, in-store music and air conditioning to make the experience more palatable to customers, some of whom would drive over 100 miles to come to the store.
According to the King Kullen website, “The Smithsonian Institute acknowledges King Kullen as America’s first supermarket, as it was ‘the first to fulfill all five criteria that define the modern supermarket: separate departments; self-service; discount pricing; chain marketing; and volume dealing.’”
King Kullen and its imitators were originally called “cheapy markets” in the industry because of their focus on low prices, but that later evolved into the term “supermarket,” and that’s because all the respectable grocery stores realized that they, too, needed to copy this concept because the Great Depression was causing consumers to search for low prices, not a pricey retail experience.
The Great Atlantic and Pacific Tea Company, better known as A&P, was the largest grocery chain in the 1930s, and it was one of the biggest casualties of the era, because it was competing in Long Island and New Jersey with King Kullen and competitors like Big Bear. By the way, Michael Cullen had worked for A&P before Kroger, so he was really savvy to how both major chains were doing business.
A&P, which had about 15,000 stores by this point, was forced to squeeze prices down, which actually had a pretty significant impact on mom and pop grocery stores and ran a lot of them out of business. After closing over a third of its underperforming stores, A&P had to adapt to the new supermarket trend.
So did Kroger, who had foolishly ignored Michael Cullen when he’d brought the idea to them before striking out to start his own chain.
Now, we have the benefit of hindsight to know that A&P ultimately went bankrupt a second time in 2015 and had winnowed down to just under 300 stores before it closed its doors for good. And we also know that Kroger is still going strong, operating over 2,700 locations and pulling in $150 billion a year in revenue. But the net income of Kroger is only about $2.3 billion.
If you know anything about business, you probably wonder if I just misstated those numbers, because that means a net income to revenue ratio of just 1.5% as opposed to the 10-20% most businesses would expect.
But no, those numbers are accurate. The supermarket business is high-volume and low-margin. Every sale generates just a little bit of revenue for the grocer, and that’s one of the reasons why Kroger is losing so much money right now in lost sales.
Because the only way to compete on price is to squeeze the supply chain, and if you weren’t aware, basic food prices are being rocked right now by a number of factors, including environmental issues, surging fuel prices, tariffs, raw material packaging cost increases and recalls for contaminated food.
Large consumer packaged goods brands have also been raising prices to the market’s breaking point to see what consumers will bear, and this is because they want to protect profits and deliver earnings to shareholders.
CPG companies still have plenty of wiggle room to deliver profits in this environment because they can do things like reduce product lines, cut manufacturing to reduce supply and focus on global markets rather than just the US.
They also can cut deals with value-priced big box retailers like Walmart or Target and warehouse stores like Sam’s Club or Costco to sell at volumes that still provide a healthy profit, and they can divert some percentage of their products to head directly for Amazon’s warehouses instead of to retail and profit from the efficiencies. And of course they can also offer their products in convenience stores or dollar stores.
In other words, big CPG brands don’t necessarily need grocery stores to thrive and survive. But most grocery stores need big brands to bring customers in.
Unless you’re Aldi, which is projected to grow this year by focusing the bulk of its sales on store brand products produced under contract manufacturing agreements. And their sister company, Trader Joe’s, is also projected to grow as it focuses on a private label approach.
Both Aldi and Trader Joe’s outperform grocery stores in revenue per square foot measurements by at least a factor of 3. And profit margins are likewise 2-3 times that of traditional supermarkets. They have a number of efficiencies that help them deliver these returns, but the most important is that they deal directly with their suppliers for most of their products.
It used to be that private label products were viewed as inferior and stores that didn’t carry big brands were thought of as being mostly for people who couldn’t afford alternatives, but during the 2008 recession, Aldi managed to convince a number of customers to give it a try for lower prices and high-quality products and has been coasting on that success ever since.
Aldi also has been focused on phasing out artificial food dyes and unnecessary chemical additives to its product, making it a favorite among those looking for low-cost items that are also perceived as being healthier or more natural.
I’d also be remiss if I didn’t mention Save-A-Lot, another low-priced grocery chain that’s based here in St. Louis and which was founded in 1977 just around the corner from where I live, over in Cahokia, Illinois.
Save-A-Lot is also doing well because they’re really focused on the growing Hispanic market. While they’re a little different from everyone else – they basically operate on a wholesale model with franchisees operating stores under license – they also strive to cut costs to deliver lower prices.
So, there is a path forward for a grocery store chain to compete, but Kroger’s already tried that with its Ruler Foods brand, basically a knock-off of Aldi’s concept but with Kroger products.
I’ve been to Ruler Foods several times and I’ve always been disappointed with what I’ve seen – undesirable vegetables and bread, packaged goods that aren’t priced that differently from other stores and lots and lots of Kroger store brand merchandise that is, and this is my own opinion of course, not as good as other store brands I’ve tried.
By contrast, I often buy produce and private label products from Aldi and especially from Trader Joe’s because I actually prefer them to what I can get at the supermarket.
Ruler Foods has always felt to me like a brand that’s meant to appeal to people who can’t afford to shop at Kroger. And it’s a little patronizing, to be honest, which is why I don’t tend to patronize them with my business.
And when I go to a standard Kroger-owned supermarket, I’m often baffled by the many ways in which the chain wants to save me money that all involve using lots of technology, from their loyalty program to scanners that let you pre-ring your items to their 84.51° retail media network that’s attempting to use big data and AI to find ways to keep customers shopping at Kroger, especially online.
But here’s a thought – it may be that the supermarket’s time has come and that grocers need to start thinking smaller, not bigger. When I was in business school 20 years ago, I remember getting very annoyed with my marketing courses for treating everything related to retail like the supermarket was the be-all, end-all of the process.
But maybe the reality is that the model doesn’t work so well in a world where food is expensive. The way to cut down costs may be to start thinking differently about how to serve customers, and if I were putting money on who’s going to come out ahead in the years to come, it wouldn’t be the big supermarket chains at all, nor would it be the big CPG brands.
It’d be the stores like Aldi and Trader Joe’s and Save-A-Lot that do everything they can to deliver value to their customers.
And hey – Kroger, and other large supermarket chains! If you need some fresh insights on how to better serve your customers, I’d love to see you turn things around. I’m happy to offer some ideas on how you can do some consumer research to get there.
But can I also give you this piece of advice? Learn from your past and do some serious employee research as well, because I’d be willing to bet you have another Michael Cullen in your ranks who’s itching to tell you what you really need to do.
And that person could transform the food industry if they’re right!
I’m Sean in St. Louis, and this has been the Marketing Gateway. See ya next time!
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