Growing segmentation in the grocery industry brought the average size of new stores in 2004 under 40,000 sq. ft. for the first time in a decade, reports the Food Marketing Institute (FMI). This overall decline in store size reflects a slowdown in the construction of full-selection supermarkets, along with an increase in specialty stores that require less space.

The big three grocers Safeway, Kroger and Albertsons, however, are holding fast to the traditional template of 40,000 to 60,000 sq. ft. stores, or moving in the direction of super-size centers to compete on both fronts.

Case in point: Hap Stein, CEO of Jacksonville, Fla.-based Regency Centers, a grocery-anchored shopping center developer, says that Kroger and Texas supermarket chain HEB are increasing their floor-plates to 100,000 sq. ft. and higher to make room for more general merchandise items, including furniture, kitchenware and apparel. Urban markets are the exception, where grocers are being forced to build smaller due to a scarcity of land opportunities that fit operators' 10-acre standard.

A survey by marketing and research firm Retail Forward found that 61% of shoppers buy their food at a conventional supermarket, leaving 39% up for grabs by specialty markets, value-oriented grocers and wholesalers. Over the last five years, Wal-Mart's share of the grocery pie grew by 17% annually, versus only 4% for supermarkets, reports Retail Forward. Wal-Mart now has 19% of total market share, and the firm is adding 200 new super centers to the market annually. As a result, its market share is expected to hit 35% by 2010.

“Everyone is looking for ways to be more competitive, and we're certainly seeing a broader offering to consumers given the threat of the super store,” says Mark Whitfield, executive vice president for the California-based private real estate investment trust Donahue Schriber.

New store construction fell for the fourth consecutive year, comprising just 3.1% of total inventory, but remodeling activity increased as store operators sought out fresh design concepts. Remodeling did not increase the size of stores by much, adding an average of only 6,500 sq. ft.

Grocers are working to improve customer relationships, says Gwen MacKenzie, vice president in Sperry Van Ness' Los Angeles office. “They're doing everything to make the experience so pleasant that customers won't want to go anywhere else.” She says major grocers are reducing prices on staples to compete with Wal-Mart while creating specialized sections that turn a big profit to make up for their losses. “There will be great things coming out of this for both customers and stockholders,” MacKenzie adds. “If a customer wants something, they're going to find a way to do it.”

A renewed focus on merchandizing may be the wave of the future. “We will see more branded departments, whether these are joint ventures with outside companies or internally developed, chain-driven brands,” says John Domino, vice president of design and construction for SuperValu, Inc., a retail food services logistics company.

“These stores will more closely resemble department stores with many “store within a store” departments, a real focus on visual merchandising and an increase in specialty lighting.”