"What do we do to survive?"
That's the No. 1 question branding expert Martin Lindstrom gets from his clients, brick-and-mortar stores.
Lindstrom's answer: entertainment. Create an "in-store sensory experience, and a sense of community, that can't be packaged and delivered by mail, or perhaps by drone in the future," Lindstrom told CNBC. "We have five senses that we can appeal to. When you go to Amazon, you have a maximum of appealing to two senses."
Appealing to all the senses is a concept that Lowes Foods, a 99-location grocery chain across the Carolinas and Virginia, is embracing wholeheartedly. The company hired Lindstrom and his team to give its traditional stores a makeover.
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Tim Lowe, president of Lowes Foods, didn't immediately buy what Lindstrom was selling, however.
"I'd be a fool to say that I was all in on day one," Lowe said. "I was scared to death, to be perfectly honest with you. This is very much outside of our traditional zone."
You can't compete on volume, you can't compete on prices because the online retailer will always win.Martin Lindstrom
The store in Clemmons, North Carolina—ground zero for the chain's reinvention of the grocery shopping experience—doesn't look like a traditional supermarket. On the outside, it looks more like a greenhouse. On the inside, it's a mix of farmer's market and theme park.
"It's an experience. It feels like a destination, like we're going to Disneyworld," said long-time customer Mike Parnitzke.
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Lindstrom hired writers from Walt Disney to create a storyline throughout the store. The most visual and unique example of that philosophy is the "Chicken Kitchen," where each chicken is celebrated with a chicken dance when it comes out of the rotisserie oven. Then there's "Sausageworks," which looks like a crazy laboratory complete with a crazy sausage professor, concocting whacky sausage flavors like the "Star Spangler," a bacon cheddar cheeseburger sausage for the Fourth of July. The "Beer Den" lets customers sample local draft beers. There's also the community table, hosting events from recipe sharing to speed dating.
"It's really about finding a connection with the guest. To have them come back and say, 'Oh my gosh, I had so much fun here in your store,'" said store manager Kate Allred.
Stephanie Wissink, senior research analyst at Piper Jaffray, agreed that brick-and-mortar stores have to create a memorable experience if they want to retain customers. "Brick-and-mortar stores are not necessarily going away," she said, "but we know that 20 percent of all specialty retail spending is done online."
According to the Food Marketing Institute, consumers spent $5.8 billion online grocery shopping in 2012. It's an industry that is attracting heavyweights like Amazon and Wal-Mart, and already has established players like Peapod.com, Freshdirect.com and Harris Teeter.
"You can't compete on volume, you can't compete on prices because the online retailer will always win," said Lindstrom.
Lowes Foods' new, rebranded store has seen basket size rise 7 percent and transaction volume increase 23 percent since January, the grocer says.
The company is remodeling 10 more stores this year, but Lindstrom said the work doesn't stop when the makeover is done. "This is like a sand castle. It's beautiful day one, day two it starts to fall apart. To communicate that to an organization of 10,000 people, and in some cases a million people, is pretty hard. It has to go through the system."
Before Lindstrom could sell the new concept to customers, employees had to buy in. Not everyone did. The company lost 30 percent of its executive team in the process.
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"They said there is this crazy guy coming in saying now we have to do a chicken dance," Lindstrom said.
Lowe agreed that there are trade-offs: "Not everyone makes that journey. There are a lot of great people out there who love doing what they do and doing the traditional grocery store experience, and what we were looking for was something different."
The company's hiring pool has also changed. "If we can go look, for example, at local schools of arts, schools of theater, let's go find some folks who can go through and play the role and actually take care of our guests, and we can teach them the grocery industry," Lowe said.
—By CNBC's Kristina Yates