Recalling the Stealers Wheel tune, “Stuck in the Middle With You,” most chains among the Top 50 largest in-store bakery operators find themselves in a battle to differentiate their brands to consumers. With Wal-Mart Supercenters winning the price war hands down and Whole Foods Markets raising the bar on quality, traditional supermarkets are rethinking their strategies with new formats and services that focus on their fresh departments. In-store bakeries for some of the Top 50 chains have emerged as key departments to demonstrate freshness to customers.   

“What an uncomfortable spot. People are picking a lane, and big grocers are in the middle,” says Tom Ertler, Prototype Director for WD Partners, the retail design firm that designed Albertsons’ new Premium Fresh & Healthy format.

Ertler and other supermarket industry observers recognize that many among the Top 50 are at a crossroads. Acquisitions and sales growth have slowed, so the largest supermarket chains are focusing internally on their strongest market areas and their current customer base.

“Some of the big players have done better this year,” says Art Turock, a supermarket consultant based in Kirkland, Wash. “Kroger and Safeway in particular. Safeway’s new ‘lifestyle’ stores seem to be working.”
Both Kroger and Safeway are benefiting from a more targeted approach to their customers. Both companies are beginning to effectively use the customer data derived from their loyalty cards to target promotional mailings and tailor product lines for specific demographics.

It is unclear whether Kroger or Safesay take that consumer information through to its in-store bakeries and fresh departments. In-store bakeries offer a wealth of opportunity for supermarkets to use their customer data to “get personal” through direct mail or products with regional appeal. Tying promotional marketing to customers’ birthdays or holidays is an ideal way to drive customers into supermarkets for in-store bakery products.

Custom opportunities in bakery
Costco Wholesale, for example, promoted its in-store bakery’s bulk packages of muffins in a mailing delivered to its members just before the winter holidays, when people are planning holiday parties and hosting extra guests in their homes. Costco is the tenth largest in-store bakery operator, and consumer demand for fresh foods contributed to much of the company’s sales growth this year, the company reports. The company stepped up store openings to about 30 in fiscal 2007.

Safeway’s upscale “lifestyle” format lifted earnings this year, the company reports. Sales at lifestyle stores that had been open for at least one year grew 5 percent. Safeway has converted 1,000 stores to the lifestyle format and expects to eventually convert all of its 1,526 locations. The lifestyle stores feature hardwood floors, olive bars and an expanded selection of natural and organic foods. Its in-store bakeries offer many traditional products with more attractive garnish, topping or packaging. Attention to these types of details in bakery can improve sales in any format, whether it is attempting an upscale image or not.

Tesco no bakery threat
Safeway, Kroger and other Top 50 executives are closely watching a much-anticipated new competitor from abroad. UK-based Tesco made its debut in the United States last month with the grand opening of its first Fresh & Easy Neighborhood Market in Los Angeles. Tesco, the fourth largest retailer in the world with $80 billion in annual sales, is investing $2 billion over the next five years towards its U.S. expansion. It plans to focus first on the Las Vegas, Phoenix and Southern California markets by opening more than 120 stores.
Fresh & Easy stores are only 10,000 sq. ft. and do not have in-store bakeries or any other fresh departments. While Tesco is known for marketing its prepared foods and grab-and-go meals, the Fresh & Easy concept offers a simple, no-frills, low-priced format with shopping convenience its primary goal. About 80 percent of the products are packaged foods with about half under the Fresh & Easy private label. The “fresh” side of Fresh & Easy may run into an image problem in the U.S. market.

“Many consumers don’t accurately distinguish between ‘packaged’ and ‘processed’ items in the grocery aisle, but consider ‘fresh’ as items in the perishables categories, which explains why they are expanding,” says Turock in his analysis of Fresh & Easy Neighborhood Market. “Employing this standard, a shopper might conclude F&E has less fresh assortment than Safeway, Stater Bros. or Ralph’s, who stock larger selections of unpackaged produce, meat and bakery items.”

Focus on fresh
Unlike previous years when acquisitions were the primary activity among the Top 50 largest in-store bakery operators, 2007 marked only a few significant mergers.

The Great Atlantic & Pacific Tea Company, Montvale, N.J., completed its acquisition of Pathmark Stores this month. The merger forms a chain of about 450 stores with 400 in-store bakeries.  

A&P completed its acquisition of Pathmark just as the chain debuted its newest prototype “Go Fresh, Go Local,” which places greater emphasis on its bakery and delis. The new store connects to the local appeal of the area where Pathmark stores are located through merchandising efforts inside the stores. Its in-store bakery is branded the “Chelsea Baking Company,” and the deli is branded “The Original 59th Street Delicatessen.”

Whole Foods Market’s deal to acquire Wild Oats Markets was still pending at press time. Merging the two largest natural foods grocers further solidifies the growing demand for natural foods, which consumers perceive as more healthful.

Some among the Top 50 in-store bakery operators are taking a cue from Whole Foods, realizing they cannot compete on price if they want to make a profit, particularly in their bakeries. As supermart chains design new formats to focus on their fresh departments, the key will be truly differentiating their brands from others stuck in the middle.