Miles of Aisles

To many consumers, the most familiar link in the food chain is not the farmer or the food processor, but the grocer. Although the food system and supermarkets are intricately linked, the two industries are as different as jalapenos and hot dogs. Food manufacturers are interested in making high-quality products as efficiently as possible. Supermarkets are interested in stocking food items that will sell most efficiently.

While food processors have adapted to changing markets by creating new products, supermarkets also have transformed the very way they do business. In just two decades, the industry has changed from small neighborhood grocery stores stocking staples and a couple of TV dinners to supermarkets, superstores, or megamarkets that are cathedrals of consumerism. Joe the kindly butcher and Gladys the checkout clerk have been replaced by an endless meat department and computerized scanners that record exactly how much money the store is making from every square inch of shelf space. "Grocery chains today are much more professionally run," says Penn State agricultural economist James Dunn. "Scanners track what is selling, and the stores are much more aggressive in getting products off the shelves."

Although superstores are the wave of the future, Dunn points out that these businesses actually have a smaller percentage of square footage devoted to food than traditional markets. Astute shoppers can see that the bigger stores have much more space allocated to ice melters, paperback books, auto wax, and other nonfood items. "The profit margins on these items are much higher," Dunn says. "And they're nonperishable, so there's no real risk of having to throw them away if they don't sell quickly."

Grocery chains must be aggressive in making decisions on what foods to stock on their shelves because more than 15,000 new food products are introduced each year–enough to replace almost every food item in the store. According to Dunn, one way that grocery chains have compensated for this rapid turnover is to require some manufacturers to pay for shelf space. Called "slotting fees," these charges make it hard for smaller companies to compete. "The dollar is dictating what stores will sell rather than consumer demand or product quality," says Joe Welch, chief executive officer of The Bachman Co., a snack food manufacturer. "It's tough, but we have to learn to deal with it."

Grocery chains have adopted aggressive strategies because their profit margins are thinner than a potato chip. "In general, a supermarket's profit is 1 percent of sales," Dunn says. "An old rule of thumb used to be that if you bought $25 worth of groceries, then tipped the bag boy a quarter, he made as much profit as the supermarket did."

Year after year, more grocery stores are being redesigned for maximum profit. Aisles and displays in supermarkets look much the same in rural State College as they do in the populous Philadelphia suburbs. The gleaming, inviting fresh produce is always near the entrance, because produce is a profit center and because consumers are buying more fresh items. Milk, cheese, meat, poultry, and fish are usually on the back wall because grocery chains want consumers to see the most profitable sections each time they emerge from an aisle. Dairy products often are furthest from the entrance. Why? Everybody buys milk, and chains want shoppers to see as much of the store as possible before getting what they came for. Stores often place milk at one end of the dairy case and butter at the other–the better to sell cheeses, yogurts, and dips. In the main aisles, the most space is given to products that bring the most profit, mainly breakfast cereals and soft drinks.

"In years past, firms developed products and then went looking for the consumer," says Tim Edmonds, vice president of grocery sales for Carlisle-based Giant Foods, Inc., which has 55 stores in Pennsylvania and 15 stores in other states. "Now it's consumer-driven across the spectrum. Look at milk. Twenty years ago, the market was whole milk, whole milk, and whole milk. Now low-fat milk –2 percent, 1 percent, and skim– dominate the market."

In Pennsylvania, no one grocery chain dominates the market. In fact, there are no national grocery chains in the state. "The size of grocery chains tends to be as big as the size of the local TV and newspaper market," Dunn says. "As a result, the atmosphere in Pennsylvania is very competitive." Dunn adds that the state's grocery chains have used store brands, often packed by Pennsylvania food processors, to establish consumer loyalty and brand awareness.

"About 15 years ago, grocery chains found that private label or store brand sales were plummeting, mainly because consumers perceived the products as poor quality," Edmonds explains. "When chains improved the quality of their own branded products, they found consumers bought them. By upscaling private label goods, stores can price their products without the advertising and marketing costs of a national brand while creating exclusivity in the marketplace."

Still, as grocery chains continue to respond to the ever-changing desires of consumers, it is up to food companies to provide products that will tickle the customer's fancy as well as the palate. "The system has become completely consumer-driven," Edmonds says. "Companies that can respond to what people want will be the winners in the long run."