Here's why the Triangle's grocery wars claimed Kroger. Who else is in danger?

The news that Kroger would close all of its stores in the Triangle came as a surprise to thousands of its loyal shoppers.

But don't expect it to be the last grocer to leave.

The Triangle's grocery market is evolving quickly and new competition looms on the horizon.

The entire East Coast is currently in the middle of “an all out attack from Wegmans from the north, Publix from the south, Amazon from the clouds and Lidl in the middle,” said David Livingston, a Wisconsin supermarket analyst who helps grocers identify and evaluate new store locations.

“Look for a lot more (grocery) stores to close on the Eastern Seaboard. I'm guessing 500 from New Jersey to Key West,” Livingston said, noting that brands such as Food Lion and the Fresh Market could be hit hard.

“Kroger-Harris Teeter is not going to keep under-performing stores open. They know exactly how much they stand to lose with all the new competition and are not going to be renewing leases where they will stuck with unprofitable stores.”

Changing tastes

The fact that Cincinnati-based Kroger decided to sell more than half its 14 stores to Harris Teeter, a North Carolina-based subsidiary of Kroger, gives a glimpse at where the grocery market is heading, analysts said.

It’s a market that is splitting in two — between the low-cost budget stores and ones that offer a unique shopping experience, along with a higher price — and Kroger happens to be stuck in the middle.

“Kroger has operated in North Carolina for many years and we have had some success, but we have not been able to grow our business the way we would like in this market, said Allison McGee, a spokeswoman for Kroger. “We have never been able to get a firm footing to be able to grow in this market.”

Kroger was the fourth-most-popular grocery store in Raleigh and the third-most-popular in Durham-Chapel Hill last year, according to Chain Store Guide, a company that analyzes grocery markets.

In fact, the company’s market share grew in both Raleigh and Durham-Chapel Hill last year. In Raleigh, its market share grew from 7 percent in 2016 to 8.2 percent in 2017 — while in Durham it grew from 14.9 percent to 17.2 percent.

But a growing market share and underwhelming results is not necessarily a contradiction, said Katrijn Gielens, an associate professor of marketing at UNC’s Kenan-Flagler Business School.

“If the growth in market share is mainly due to lower prices … it may still lead to lower profits,” she said. “I assume that the combination of their cost structure and their lower price margins was not compensated by higher traffic/share.”

Gielens said that the new grocery stores entering the market will balance out the ones leaving, so consumers will still have a lot of options. But that is also creating a clear divide in what is offered.

"There's lots of competition coming in below. (Budget) players that are eating at their margins," Gielens said of the impact grocers like Lidl and online shopping is having on Kroger.

Gielens said the online threat is still small — only around 9 percent of all retail purchases — but it has got consumers used to extremely low prices that stores have to try and match. Kroger said earlier this year that despite sales growth, its margins were suffering. Analysts attributed the lower profit margins to rising labor costs and the inability to raise prices because of steep competition.

"Kroger is in same realm as Bi-Lo," Gielens said, adding that their stores are too big, too old and have too many products. (Bi-Lo, which operates stores in Charlotte and South Carolina recently closed six stores in the Charlotte region.)

On the other end, there are the grocers who are trying to offer a more unique shopping experience at a higher price point.

If you can't win the war on prices, then you have to find another reason to get people to come in your store and pay higher prices. For Harris Teeter one reason could be its North Carolina heritage, said Roger Beahm, executive director for the Center for Retail Innovation at Wake Forest University.

"Harris Teeter pricing, on average, is higher than Walmart or Food Lion (another store with a North Carolina heritage). So unless you are going to lower your prices and position yourself around low pricing (a no-win option for them), you've got to offer another reason for shoppers to come to your store ... one that's different and still important to shoppers," Beahm said. "Local heritage is a good one to leverage today."

Harris Teeter also does a better job of curating the shopper experience than Kroger, Gielens said, especially in regard to its deli and its use of floor space for things like a hot bar, prepared food and Starbucks.

"A lot of categories that once were important you want to de-emphasize now" because of price pressures, Gielens said. Instead you want to emphasize "something unique that you can't get everywhere."

But new competition is expected to be stiff, especially with multiple Wegmans and Publix stores planned for the region.

"The Wegmans of the world are the best example of being diversified. How you can be completely different from everyone else," Gielens said.

Wegmans are set up different than other grocery stores — including an open-air market and a sit-down restaurant — and their stores include bakeries, cheese shops, sub and pizza shops and a flower section. That's something other grocers, including Harris Teeter, are beginning to adopt, Gielens said.

Ryan McDevitt, an associate professor of economics at Duke’s Fuqua School of Business, agreed with that.

"With consumers' preferences shifting to private label and prepared foods — areas that Wegmans, Whole Foods and Trader Joe's do very well — the old guard isn't viewed as offering a compelling value any longer," he said.

“Kroger no doubt evaluated their whole portfolio of brands when deciding to close Kroger throughout the region,” McDevitt added.

Harris Teeter is closer to Wegmans and Whole Foods than it is to Kroger and Food Lions, he said.

Closing Harris Teeter stores?

In announcing the closings, Kroger said the Triangle has too many grocery stores. Beahm pushed back on that assertion. The number of grocery stores per thousand people in the Triangle (0.23 stores) isn’t much different than Charlotte (0.28) or the Triad (0.27), according to SimplyAnalytics.

He says the closures are an admission that Kroger doesn't think its brand can compete with new competition, Beahm said.

So instead it is investing in Harris Teeter.

“Their acquisition of (Harris Teeter) a few years ago gave them an immediate and solid market position, one which mitigated the need to open more stores under the Kroger name,” Beahm said. “They are, as Andrew Carnegie once said, putting ‘all of their eggs in one basket, and watching that basket.' "

That should help make the company more efficient in the Triangle and help it become more profitable here, he said.

But putting all of its Triangle eggs in the Harris Teeter basket could result in Harris Teeter closing some stores, as some of the Kroger stores that Harris Teeter is remodeling are very close to existing Harris Teeters. One of them, in Fuquay Varina, is less than a mile apart from an existing Harris Teeter.

“I foresee Harris Teeter closing a number of the stores that cannibalize one another,” McDevitt said. “Just like with malls, close proximity is becoming a less important factor for customers when selecting a store, especially as more shopping moves online. Saturating an area with Harris Teeters won't protect them from that trend — they'll just be stuck with a lot of fixed expenses to spread over a shrinking customer base.”

When asked whether any existing Harris Teeter stores could close, Danna Robinson, a communications manager for Harris Teeter, said, "We intend to finalize our plans while the former Kroger stores are closed."

No change in prices

And don't expect food prices to rise across the board because of Kroger leaving the market.

That’s because there are so many grocery stores competing for customers right now, and even once Kroger is gone, the number of stores isn’t likely to decrease.

“There is somewhat of a price war going on related to the Lidl entry, Amazon's Whole Foods acquisition and Walmart’s re-commitment to price,” Gielens said. “So for pure like-for-like products no one can afford to raise prices at the moment.”

“Kroger technically is not leaving the market; it is closing a banner in the area,” she added. "So the number of retail players in the area is not going down. If anything it is going up with all the new retailers entering.”

Consumers might just have to get used to going to a store they haven’t in the past.

“It doesn't seem like anyone is going to lose access to a grocery store as a result of these changes,” McDevitt said. “And there will still be a number of options at Kroger's price point — though it might require a bit more driving to get to them.”

"Harris Teeter and Food Lion, because they are the closest competitors to Kroger, should benefit the most," he added. "Walmart and Target will probably capture some former Kroger customers as well."

Grocery Market Share in Raleigh

Store Brand# of stores (Raleigh)Raleigh Market Share 2017Raleigh Market Share 2016
Walmart Supercenter1820%20.1%
Food Lion6218.5%18.6%
Harris Teeter3016.4%16.4%
Sam's Club34.5%5.3%
Lowes Foods144.4%4.7%
BJ's Wholesale44.2%4.3%
Whole Foods32.5%2.5%
Trader Joe's21.3%1.3%
Dollar General411.2%1.2%
Walmart Neighborhood Market31.2%1.2%
Dollar Tree/Family Dollar631.1%1%
The Fresh Market30.8%0.7%
Carlie C's50.6%0.6%
Sprouts Farmers Market10.4%N/A
Other operations352.3%1.3%
Source: Chain Store Guide

Grocery Market Share in Durham

Store Brand# of Stores (Durham)Durham Market Share 2017Durham Market Share 2016
Walmart Supercenter618.7%19%
Food Lion2218.4%18.7%
Harris Teeter913.8%14%
Whole Foods24.7%4.8%
Sam's Club14.3%3.8%
Weaver Street Market32.6%2.5%
Trader Joe's11.9%1.9%
Dollar General 201.7%1.6%
The Fresh Market21.4%1.4%
Dollar Tree/Family Dollar271.3%1.1%
Compare Foods31.2%1.6%
Lowes Foods10.9%1.8%
Carlie C's10.4%0.4%
Other operations141.3%0.8%
Source: Chain Store Guide

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