Expansion and Facilities and Retail and Real Estate & Retail

Kroger, Marsh continue store-upgrade spree

December 22, 2008
Even in the midst of a recession, one form of economic activity continues apace — supermarket construction and refurbishment. This year, Kroger is on track to drop just shy of $70 million on the stores in its vast central division — an Indianapolis-headquartered territory containing 153 locations, most in Indiana and Illinois.

More than half those stores received face-lifts in the last six years, and Kroger isn't slowing down. After dropping $1 million to revamp the chain's venerable Broad Ripple store, among other local projects, it's revving up to build a $12 million store early next year in Nora.

Not to be outdone, locally based Marsh Supermarkets — which operates Marsh stores, Marsh Hometown Markets, and O'Malia's Food Markets — is in the midst of an extensive revamp of its 104 Indiana and Ohio locations.

Though management declined to be interviewed for this story, Marsh's recent efforts include four spruced-up stores at 5249 E. Thompson Road, 1815 Albany St. in Beech Grove, 5104 N. Franklin Road, and 2135 N. Post Road.

Why, in the midst of such tough economic times, are the city's two dominant grocers dropping small (actually, not so small) fortunes on new lighting, new paint jobs, more in-store dining options, and bigger locations? Primarily because they have no choice. The redesign strategies both companies follow are slightly different, but their motives are the same: keeping up with both the competition and consumer expectations.

"There's an old saying in the supermarket business that if you're not investing in upgrades and remodels, you're going backwards," said Meg Major, senior editor with the trade publication Progressive Grocer. "Customers simply aren't going to shop at a tired, old, beaten-down, plain vanilla store anymore."

It was the lack of such regular investment in store upgrades that ran Marsh into the weeds a couple of years ago, forcing it into the arms of the turnaround firm Sun Capital Partners, whose vast portfolio of properties includes such once-flailing brands as Hickory Farms, Boston Market and Fazoli's Restaurants. Since acquiring Marsh, the Florida-based company has closed unprofitable stores, rationalized operations and revamped the locations it kept.

"Sun Capital bought Marsh two years ago, and there were some stores in need of remodels, including the O'Malia's downtown, which is the one nearest and dearest to my heart," said Danny O'Malia, former president of O'Malia Food Markets and formerly chief customer service officer for all Marsh and O'Malia's stores. "They had not gotten remodels due, I guess you might say, to cash flow problems. Sun provided an infusion of capital and remodeled a bunch of stores."

The casual observer might wonder about this frenzied pace of improvements, especially considering that Wal-Mart seems content to offer its goods in warehouse-like settings that could charitably be called "aesthetically challenged."

Competing on 'value'

The reason retailers (and chains such as Aldi) can get away with that is because they compete strictly on price, whereas grocers such as Kroger and Marsh bet the farm on "value."

Rather than slug it out over who can offer the lowest price on a can of creamed corn, they try to differentiate themselves by offering extra services (such as an actual human being at the meat counter) plus highly lucrative bells and whistles such as full-service bakeries, delis and coffee shops.

"It's service, it's ambience, it's the salad bars, it's the coffee bars, it's the sushi bars," said Mark Perlstein, partner at Sitehawk Retail Real Estate. "It's these things that tend to attract a higher-end customer. You usually don't find them at Wal-Mart stores."

You also won't find many ready-to-go meals at Wal-Mart. But they're becoming common (and profitable) at full-service grocery stores.

"Pre-prepared meals are becoming a very important component of their business," Perlstein said. "It's a category that didn't exist 10 years ago, or even five years ago. But it's becoming prevalent in a lot of the supermarkets today."

Some industry executives speculate that Marsh's recent remodeling binge has forced Kroger, the nation's largest pure grocery chain, into following suit.

"Marsh has always been known for pretty nice stores," O'Malia said. "The old Marsh let some of their stores slide a little bit. When you refurbish, as they're doing now, it gives the operation a shot in the arm. Kroger could be doing that [refurbishing its stores], figuring they've got to do it just to keep up with Marsh."

For its part, Kroger management scoffs at the idea that its Indianapolis-area plans are influenced in any way by the activities of a regional player.

"We have not made any change in terms of priorities and pacing for our investments relative to what Marsh is or isn't doing," said John Elliott, public affairs manager for Kroger's central division.

"In this industry, if you don't do a remodel on roughly a five- to 10-year cycle in your stores, you have not kept pace. [Marsh's] acquisitions and their investing in things like florists and catering took capital away that did not go into reinvesting in their stores. So they had fallen significantly behind."

The Sun-led Marsh is making up for lost time. Sun manages more than $10 billion in equity capital, and also has freed up millions of dollars for upgrades by selling Marsh stores and leasing them back.

But Marsh can only dream of the resources Kroger brings to the table. It operates 2,600 stores nationally, has annual revenue topping $70 billion, and is the 80th-largest corporation in the world.

From 2003 through 2008, the company expanded or remodeled 85 stores in its central division, plunking down $410 million ($68 million per year) for things such as improved lighting and new produce department layouts. Even with the recession, the company is on track to drop a similar amount in 2009.

"Well, it caused us to re-evaluate the 2009 capital investment plans — to take a second and actually a third look," Elliott said. "However, we are leading the industry now in revenue. Our financial and sales performance is very strong. So we made a decision to go forward unchanged."

Selling convenience

Such grand plans would be the envy of many retailers. But when it comes down to particulars, Kroger is doing pretty much the same things Marsh does — pushing service, ambiance and more convenience items.

"The south-side Indianapolis store that we just completed [5325 E. Thompson Road] has investments in produce, floral, bakery and deli," Elliott said. "And in the bakery and deli area, a lot more offerings in terms of prepared meals — a soup bar, a pasta bar.

"Today's 21st-century food store consumer is looking for healthy, nutritious, ready-to-eat meals that they can take home. They want economical alternatives to restaurant meals. The strongest sales growth for us now, and it's across the entire division, is in the category of meals that are ready to eat."

The idea is to make it oh-so-convenient for someone rushing in to buy a quart of milk to also nab a salad or a rotisserie chicken on the way out. And if the store's up-to-date decor makes a good impression, so much the better. Customers may not consciously notice some of these things, but experts say they're nevertheless essential to survival.

"Every retailer I know, from Marsh to Meijer, every single solitary one of them has a very robust, ongoing store improvement campaign," Major of Progressive Grocer said. "I think it's entirely incumbent on each and every aggressive grocer to keep their stores modern and up to date. Because customers have too many options. If you don't, they'll go somewhere else."
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