Online didn't murder the grocery store!

Online's undeserved bad reputation means it is now the prime suspect in any situation where a physical store has problems. If a shop downsizes, online is to blame. If a retailer cancels new store openings, online is the culprit. And if an outlet closes, online is the murderer!

The closure of several Safeway stores in Arizona is a case in point. As is noted in this article, the use of Amazon, the rise of internet food subscriptions, and the boom in meal kit delivery - all subsets of the online revolution - are the causal factors for changing shopping habits and the demise of Safeway's shops:

Such pronouncements are easily made and seemingly logical. However, they do not, in themselves, provide conclusive proof that online is to blame. Such a charge can only be made after a fair trial based on objective evidence. 

So, let us examine the real reasons for the closure of Safeway's Arizona stores. 

Exhibit 1: online's alibi

The first thing to note is that online plays a very small role in grocery retail. Indeed, grocery is one of the least developed sectors in digital terms with just 4.8% of all sales being made online in 2017.

If the national picture suggests online's role is limited, in the case of Arizona the figures are even starker. Take Safeway's store on East Thunderbird Road: this is in a neighborhood of limited means where online grocery shopping is virtually non-existent. Within the 5-minute drive time radius, a mere 0.9% of grocery spend was made online in 2017. Within a 10-minute radius, the figure is 1.3%. And within a 15-minute radius, it is still a subdued 2.7%.

Online penetration and drive times. Source: GlobalData analysis

Moreover, the online growth rates in each of these zones, which collectively account for more than 90% of that particular Safeway store's customer base, is extremely low and well under the national average. 

In essence, online is simply not a factor in this area. As such, to charge it with the murder of the store when it is not even present is unreasonable and unjust.

Exhibit 2: the real culprit

If online is not to blame, then why is Safeway closing its shop on Thunderbird? One of the main reasons is the store's high prices, which have deterred many people from shopping there.

For a basket of typical items, here's how that Safeway store stacks up against neighboring outlets:

• Walgreens (located a few doors away): Safeway 10.1% more expensive
• Food City: Safeway 6.8% more expensive
• Family Dollar: Safeway 39.8% more expensive
• Walmart: Safeway 27.3% more expensive
• Target: Safeway 17.1% more expensive

These are not just small differences, they are huge disparities which mean Safeway is completely out of step with the competitive dynamics of the area. The same largely holds true for other Safeway stores across Arizona.

Exhibit 3: why price matters 

If the Safeway store was located in an affluent neighborhood where money was of no object, charging a premium might be of little consequence. However, the Thunderbird outlet is in a relatively low-income area. 

The median household income in the zip code where the store is located is $62,000; within the immediate catchment around the store, it is significantly lower. This compares unfavorably to neighboring zip codes where median income rises to as high as $114,573.

It goes without saying that many of those who live nearby to the Safeway store need to budget. And that means many have drifted away from Safeway to cheaper alternatives.

Exhibit 4: prices aren't justified

Safeway isn't just high priced, it is also bad value for money because there is nothing that justifies its more expensive offer.

The store environment is mediocre at best. Service is reasonable, but nothing special. Own label products are fairly standard. And services like ready-prepared food and counters are far from inspiring.

The Safeway store on East Thunderbird Road

This means that those consumers looking and willing to pay for a better grocery proposition have migrated elsewhere. Nearby branches of Sprouts, Whole Foods and Trader Joe's have all gained market share from this Safeway store over recent years. 

Exhibit 5: not tailored to local demand

A further issue with the Safeway store is that it is not tailored to local demand. Indeed, the store is no different to other Safeway shops across the country.

However, the catchment area is different from neighboring locations in a number of ways. The most notable being that it has a much higher percentage of Hispanic consumers. Here are the latest percentages for the zip code in which the Safeway store is located, and for two neighboring zip codes:

• Safeway store zip code, 85032: 28.2% Hispanics 
• Neighboring zip code, 85254: 5.8% Hispanics 
• Neighboring zip code, 85022: 21.4% Hispanics 

While Hispanic consumers buy many of the same products as other consumers, they also have specific requirements. Many have larger families, so like bigger pack sizes. Others have a strong preference for Mexican brands. Safeway does not cater for this and, as such, has lost share to outlets like Food City which offer a more tailored mix that is curated and sensitive to local demand.

The recent refurbishment of nearby Food City stores has made them even more attractive compared to Safeway.

The Food City store near to Safeway

Summing up: Safeway not up to the job

The blunt truth in this case, is that Safeway has not developed its proposition in a way that is attuned to demand. Nor has it kept pace with the competition.

In a market with little choice, this would not be a problem. However, these Safeway stores operate in a location where consumers are spoiled with many grocery outlets - big and small, specialist and non-specialist, premium and basic.

Map of main competition to Safeway on East Thunderbird Road

The failure of Safeway to compete on price, its failure to develop a unique and interesting shopping experience, its failure to adapt to local needs, and its general failure to innovate and invest in the face of rising competition have all contributed to its demise.

The verdict is clear. Online is not-guilty. Safeway is responsible for its own death.