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Big Retailers Fill More Aisles With Groceries

For dinner tonight, pick up some sushi and salad — at Walgreens. Or maybe some Targetchicken.

Reflecting a major shift in the way Americans shop for food, retailers better known for selling clothes or aspirin, including Walgreens , CVS/Pharmacy and Target , are expanding in a big way into the grocery business, with fresh produce, frozen meats and, yes, even sushi.

Woman bagging groceries
Katrina Wittkamp | The Image Bank | Getty Images
Woman bagging groceries

Target invested $500 million last year alone in a new push on groceries, retrofitting some of its general merchandise stores with full-blown food sections.

Sales and trafficat stores with the new grocery areas are about 6 percent higher than at similar stores without them, the company says.

Walgreens began making over some stores in Chicago and New York a year ago, and added up to 500 food items.

CVS/Pharmacy last year redesigned about 200 of its stores in urban areas like Boston, Detroit and New York, and expects to make over about 20 percent of its 7,100 stores in all.

As a result, people who typically went to the grocery store once a week to stock up are instead stopping by places whose food items used to be limited to a bag of chips or a can of soup.

And retailers are viewing it as an opportunity to increase sales by getting people in their stores more frequently.

“It’s going to be a big food fight in the sense that you’re going to have so many people going after this sector,” said Bill Dreher, a retail analyst with Deutsche Bank.

The changes have hit the traditional grocery businesses, stores like Supervalu and Safeway, whose profits had already been declining because of rising food prices, fixed real estate and labor costs, and more competition.

Like the grocers, the convenience stores and discount stores are not making a lot of money on their groceries.

Instead, the goal is to draw more customers.

People shop for food on average about 2.5 times a week, Mr.Dreher said, compared with once a month or so for a drugstore or Target.

So if the stores can entice shoppers to pick up some groceries on the way home from work, marketing data shows they are likely to add some paper towels or nail polish or a DVD to their carts, spending around the same amount each time they visit.

“Instead of having you stop at a supermarket or a fast-food place,” said Bryan Pugh, vice president for merchandising for Walgreens, “could I potentially entice our shoppers with a better range, better assortment?”

So far, the drugstore sales of grocery items are too small to be statistically significant, but they are growing, according to Janney Capital Markets, which estimates that Wal-Mart has about 33 percent of the grocery market, and Target about 3 percent; Kroger, Safeway and Supervalu each represent 4 to 9 percent.

“Stomachs haven’t gotten significantly larger, yet you have, probably, at least 10 percent per capita more square footage than you did in the ’80s” devoted to grocery, said Jonathan P.Feeney, an analyst with Janney.

Target began opening stores primarily devoted to groceries, called SuperTargets, in the 1990s.

But two years ago, seeking to lure customers during the economic downturn, it began trying out grocery areas in its traditional multipurpose stores.

It now has groceries in about 450 of its 1,750 stores.

Another 400 are planned for 2011, and Annette Miller, Target’s senior vice president for grocery, said she expected an expanded food department to move into most Target stores eventually.

The grocery section is laid out with islands stacked with fresh vegetables and bakery items, surrounded by refrigerated cases carrying items like pizza, burritos and chicken.

Target also carries sandwiches and quick lunches in stores near office buildings.

“What we’re finding with this new layout is the number of trips is really increasing,” said Ms.Miller, adding that when customers come in, they are “still shopping the entire store.” Mr.Dreher of Deutsche Bank estimated that shoppers go to Targets with groceries almost twice as often as patrons visit regular Targets.

While the gross margins of the grocery business are about 18 percent, well below those of retail, which are about 30.5 percent, groceries both drive visits and make existing stores more profitable, said Colin McGranahan, an analyst with Sanford C.Bernstein.

At drugstores, the emphasis on food goes beyond increasing foot traffic, to the broader goal of selling more items outside the pharmacy.

“The drugstores were an incredibly profitable business,” said Mr.Dreher, the Deutsche Bank analyst, when most people paid for prescriptions with cash 10 or 20 years ago.

But now, third-party plans are paying for more prescriptions (often at deep discounts), and drugstores’ profitability on prescriptions has declined.

So they are pushing other items, with expanded cosmetics departments and bigger toy aisles.

Foodis one way to get shoppers in stores for reasons other than picking up prescriptions.

Walgreens is devoting up to 40 percent of the space in its redesigned stores to fresh and frozen groceries as a test to see how well food sells.

It offers items like cut fruit or sushi in office locations, and staples like lettuce, bananas and meat elsewhere.

In higher-income areas, like at one of its Duane Reade stores in Brooklyn, the food section looks like a gourmet grocery, offering six varieties of cage-free eggs, gnocchi, shitake mushrooms and mochi ice cream balls.

The refurbished CVS/Pharmacy stores have larger grocery sections, and also have self-checkout kiosks for quicker trips.

“In urban markets, where there are often not as many groceries or supermarkets, we’re finding that these customers are shopping our stores much more for that purpose,” said Michael DeAngelis, a CVS spokesman.

Grocery stores have largely abandoned inner cities over the recent decades, as suburban areas offered more space for parking and unloading trucks.

That has led to “food deserts,” as sociologists call them, where urban, low-income areas have little access to fresh or affordable groceries, though there is fast food aplenty.

Though drugstores may be convenient, they are not necessarily a terrific deal for grocery customers.

Drugstores buy and store food less efficiently than grocers do, so their food prices are higher.

To take one example, a Siggi’s yogurt at a Duane Reade in Brooklyn costs $3.19; at a corner store nearby, it costs $2.75.

“There is a cost of convenience, because we are on some of the best corners in America,” said Mr.Pugh of Walgreens.

Still, Mr.Dreher said, the drugstores’ food offerings are an alternative in cities like New York to even more expensive food from neighborhood groceries or bodegas.

And with the addition of produce, “it’s actually fresh and healthy food,” he said.