Virgin on Business: In Line vs. Online

Long after every other corner of retailing has been
overrun by the online shopping crowd, and all other brick-and-mortar outlets have become cobweb-and-dust repositories, grocery stores will endure.

Not that the point-and-click types, led by some local players, arent trying to do those in as well. The supposed allure to consumers of swapping the experience of wobbly-wheeled shopping carts, long checkout lines and congested parking lots for the convenience of home shopping and delivery seems so obvious that would-be providers of the service figure the transition is as inevitable as it was for books or apparel, and they ought to be in on it.

But the grocery business is tough enough as it is without adding additional layers of complexity, as can be attested to by the experience of HomeGrocer.com (acquired by Webvan, also long gone).

Part of it is practical and logistical. Grocery stores deal with a near-infinite variety of types, shapes, sizes and weights of products, from a near-infinite number of producers and sources, many of those products having limited shelf life and requiring special handling. Labor and capital costs are high; margins are thin.

To match what physical grocery stores can do means coming up with a viable competitor to a model that has been improved and refined for decades. Grocery stores of today are larger and nicer than the typical model of 30 years ago. Theyre backed by a complex and yet remarkably efficient supply chain, also built and improved over decades.

Theres also a cultural reason for the continued endurance of the grocery store, one rooted in consumer behavior. People like to see, feel, sample and compare what theyre planning to eat, especially in the fresh/perishable categories, in a way online retailing cant (as yet) match. So retailers will continue to put their dollars toward physical stores, the complexities and challenges of the business notwithstanding.

That realization is useful background context for understanding the significance of a fascinating recent news item featuring a Northwest grocery chain that, not long ago, appeared to be fading into the retailing sunset. In order to win regulatory approval for the merger of the Safeway and Albertsons chains, the companies are selling 146 stores to Bellingham-based Haggen Inc.

Its a remarkable turnabout for a company that in recent years has been contracting rather than expanding, having closed multiple locations of its Top Foods subsidiary. Haggens current store count? Eighteen. But now, backed by Florida-based private equity firm Comvest Group, which bought a majority stake in 2011, it goes from a smallish regional chain to a significant presence in its existing markets of Washington and Oregon and also adds California, Nevada and Arizona to its footprint.

Haggens revival is also a signal of the grocery segments continued strength in its traditional form. That a private equity company sees value in committing millions to a major expansion of a physical retailer, going up against some much larger players as well as what might be looming in the way of online competition, says a great deal about the sectors potential and opportunities.

The Haggen deal is also a reflection of the industrys resistance to consolidation. If anything, fragmentation is increasing. No one has a dominant position; just count the number of players with multiple locations in this market: Safeway, QFC/Fred Meyer, PCC, Trader Joes, Whole Foods Market, Metropolitan Market, Saars, Red Apple, Thriftway, Uwajimaya, 99 Ranch Market, Viet Wah, Walmart, Target, Costco, WinCo Foods, Grocery Outlet.

Did I miss anyone? Very likely. The list doesnt include single-location retailers, drugstore chains that increasingly include food items in their inventory, seasonal and year-round farmers markets, specialty food purveyors and producers own retail outlets.

Online retailers may figure out the logistics, finances and consumer preferences in a way that makes obsolete the grocery store of today, but that event looks to be a long way off. We all gotta eat, and as long as thats the case, a huge portion of the American grocery budget will still be spent in a physical store.

Monthly columnist Bill Virgin is the founder and owner of Northwest Newsletter Group, which publishes Washington Manufacturing Alert and Pacific Northwest Rail News.