Specialty Food Stores
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Industry Overview
The US specialty food store industry includes about 20,000 stores with combined annual revenue of $20 billion. Major companies include Whole Foods Market and Trader Joe's. The industry is fragmented: the 50 largest companies account for less than 50 percent of sales.
The industry includes gourmet food stores, natural/organic food stores, health food stores, meat or seafood markets, fruit and vegetable markets, bakeries, and candy and nut stores. Grocery stores and supermarkets and superstores and warehouse clubs that sell food are covered in separate industry profiles.
Competitive Landscape
Consumer spending and tastes drive demand. The profitability of individual companies depends on effective merchandising and the ability to generate store traffic. Large companies can offer a wide selection of products and have advantages in purchasing, distribution, and marketing. Small companies can compete effectively by offering specialty products, providing superior service, or serving a local market. The industry is labor-intensive: average annual revenue per worker is about $100,000.
Competition includes traditional grocery stores, mass merchandisers, and warehouse clubs. Specialty food stores also compete with any venue serving food, including restaurants.
Products, Operations & Technology
Major products sold by specialty food stores include meat, fish, and poultry (40 percent of sales); produce (15 percent); and baked goods and candy (10 percent each). Other products include dry grocery products, dairy products, prepared foods, and kitchenware. Companies may place special orders for customers looking for unique items.
Specialty food stores include chains, independent retailers, franchises, and cooperatives. Franchises include companies such as Great Harvest Bakery, Cinnabon, and Rocky Mountain Chocolate Factory. Specialty food cooperatives are typically member-owned and -operated. Store size and format can differ significantly. A large specialty grocery store can exceed 20,000 square feet, while a candy store can be less than 1,000. Companies may use a kiosk format to offer a small selection of products and to fit into non-traditional spaces.
Store layout is typically organized by product type, and companies often place complementary departments near each other to promote incremental sales. Specialty food stores may have instore bakeries, kitchens, or delis (also known as charcuteries). Retailers offering organic food must follow strict procedures to prevent contact with non-organic foods and substances. Organic merchandise also requires companies to keep records regarding product handling and vendor relationships.
Merchandise mix helps determine locations. For example, specialty grocery stores with a broad range of products may seek out strip malls or areas with other large retailers to help drive traffic. Because customers are willing to travel to buy unique merchandise, stores specializing in a few categories (meat or produce markets) may be farther from major shopping areas. When evaluating store locations, companies typically consider population density, traffic patterns, tenant mix, visibility, and accessibility. Because specialty food products tend to appeal to affluent consumers, companies may also consider education and income levels for the surrounding area.
Specialty grocery stores offer categories similar to traditional supermarkets, but stock unique or hard to find products within each category. Popular specialty food categories include specialty coffee/tea, olive oil/specialty oil, cheese, and chocolate. Companies may also focus on a particular category, such as baked goods. Stores specializing in ethnic foods offer imported merchandise. Perishables, such as produce and meat, require careful inventory management due to potential spoilage. Some specialty food stores offer private-label products.
While companies may buy directly from manufacturers, distributors and farm cooperatives are important because the supply and retail segments for many categories in the specialty food industry are highly fragmented. Large companies may have multi-year contracts with key suppliers and enjoy volume discounts. Small companies may join cooperatives to leverage increased purchasing power. Chains often have separate distribution centers for products requiring special handling, such as seafood.
Most specialty food retailers use computerized information systems to manage point-of-sale (POS) transactions and inventory movement. POS systems use scanners to track individual items by Universal Product Codes (UPC). Integrated systems linking sales and inventory allow companies to identify fast- and slow-moving products and minimize out-of-stocks and excess inventory. Large companies may use price-optimization software to maximize profitability. Voice-activated stock picking improves the efficiency of warehouse operations.
