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The Changing Face of AmericanGrocery StoresbyBrian Stoffel, The Motley FoolOct 27th 2013 8:45AM

Updated Oct 27th 2013 8:46AM

Over the last two decades, the way we go about getting our food in America has changeddramatically. To appreciate the full scope of this change, and what it means for bothconsumers and investors, it is a tale best told in two parts.

Part One

The first part of our story starts in 1978 in Austin, Texas. Back then, a college dropoutnamed John Mackey joined forces with friends and investors to form what wouldeventually becomeWhole Foods Market .

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Mackey grew up in the counterculture of the 1960s, thought that "corporations wereessentially evil," and was a member of several food co-ops. But his time with the co-ops lefthim disillusioned and looking for alternatives:

Much more energy was focused on deciding which companies to boycott than on how toimprove the quality of products and services for customers. I thought I could create a

better store than any of the co-ops I belonged to, and decided to become an entrepreneurto prove it.

Since this epiphany, Mackey has been able to tap into and lead one of thestrongest andmost persistent movements of the last century: a reworking of our relationship with the

food we eat. Indeed, since 1998 (the furthest back that such numbers were tracked) salesof organic foods have increased at almost 17% per year.

Part Two

The second part starts around 1996. Leading up to that year, Wal-Marthad beenexperiencing double-digit revenue growth for as far back as investors could remember.

But something was happening; that growth was slowing.

During the fourth quarter of 1995, the company posted revenue growth of 12.2% -- notbad by any means, but it was the slowest growth the company had posted during the past10 years. Management began thinking of ways to continue driving traffic into the stores,and that's when a pivotal decision was made: Double down on the grocery business.

The thinking was pretty simple: Food was just a ploy to get more customers in Wal-Mart's doors. People would come to buy groceries, but while they were there, they would

also purchase other goods. Wal-Mart could offer groceries for less because it would relymore heavily on increased merchandise sales for profit, while offering the groceries forrazor-thin margins.

Back then, Wal-Mart accounted for just 4% of all grocery purchases in the United States.It had devoted 4 million square feet at its distribution centers to food items. But over thenext decade, that number increased ninefold.

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Source: MWPVL. DC = distribution center

Today, Wal-Mart devotes almost 35 million square feet at its distribution centers to food.And the proportion of nationwide grocery purchases made at Wal-Mart stores hasexploded to a mind-boggling 25%. That's right: One out of every four food purchases inour country today happens inside of a Wal-Mart, and much of that has been at theexpense of traditional grocers nationwide.

Where we sit now

By no means have traditional grocers been put out to pasture, but they are no longer theonly big players. Here's a look at the top 10 publicly traded grocers by sales in 2012, aswell as their total market share.

Company Brand Name2012 Sales

(billions)National Share

Wal-Mart Wal-Mart $274 25%

Kroger Kroger $87 8%

Target Target $72 7%

Safeway Safeway $38 3%

Ahold Giant $26 2%

Delhaize Food Lion $19 2%

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Company Brand Name2012 Sales

(billions)National Share

Whole Foods Whole Foods $11 1%

SUPERVALU Save-A-Lot $9 1%

Harris Teeter Harris Teeter $5 0.5%

Roundy's Pick 'n Save $4 0.5%

Source: Progressive Grocer. Market shares worked backward from Wal-Mart's 25%national share.

Since these two disparate movements started, others have joined in. Targethas joinedWal-Mart in offering conventionally grown food for cheaper than other grocery storescan afford. Whole Foodshas been joined by the likes of Trader Joe's (among others),which would have placed just behind Whole Foods in the list above if it were publiclytraded.

And in the middle, many traditional grocers have been feeling the pinch. The "WholeFoods Clan" has taken away high-end shoppers who are looking for the healthiestoptions. And the "Wal-Mart Clan" has stolen away the bargain hunters who want thecheapest prices they can find on food.

In such an environment, a wave of sales and mergers has taken place. SUPERVALU wasforced to sell some of its biggest brands (Albertson's and Jewel/Osco) because of decliningsales and profitability issues. Safeway will be exiting the Chicago market, and is rumoredto be a buyout candidate. And Harris Teeter has already agreed to be bought out by

Kroger.

In reality, the only traditional grocer that's been able to survive this movement unscathedis Kroger. The grocer has been able to increase its presence and same-store sales during atime when many -- if not all -- of its peers could only dream of such results.

Value hounds might find profit in these traditional players, but long-term investors willbe rewarded by taking these long-term trends into account when deciding where to investtheir hard-earned cash.

But there's a dark horse that could steal the most market shareAs if there weren't already enough disruption in the industry, there's another giantmoving into the space that could rewrite the rules of how food is sold. That company isthe first one covered in our special free report: "3 Companies Ready to Rule Retail." Thiscompany is personally my second-largest holding, accounting for 12% of my retirement

holdings. You can uncover these top picks free today; justclick here to read more.The articleThe Changing Face of American Grocery Storesoriginally appeared on

Fool.com.

The Death o f the PC

The days of paying for costly software upgrades are numbered. The PC will soon be

obsolete. And BusinessWeek reports 70% of Americans are already using the technology

that will replace it. Merrill Lynch calls it "a $160 billion tsunami." Computing giants including

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IBM, Yahoo!, and Amazon are racing to be the first to cash in on this PC-killing revolution.

Yet, a small group of little-known companies have a huge head start. Get the full details on

these companies, and the technology that is destroying the PC, in a free video from The

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Click Here, It's Free! Privacy/Legal Information

Fool contributorBrian Stoffelowns shares of Whole Foods Market. The Motley Foolrecommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market.Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold thesame opinions, but we all believe thatconsidering a diverse range of insightsmakes usbetter investors. The Motley Fool has adisclosure policy.Copyright 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool hasadisclosure policy.

Connect and Develop: Inside Procter & Gambles New

Model for Innovation

Procter & Gamble launched a new line of Pringles potato crisps in 2004 with pictures and words trivia

questions, animal facts, jokesprinted on each crisp. They were an immediate hit. In the old days, it

might have taken us two years to bring this product to market, and we would have shouldered all of the

investment and risk internally. But by applying a fundamentally new approach to innovation, we were able

to accelerate Pringles Prints from concept to launch in less than a year and at a fraction of what it would

have otherwise cost. Heres how we did it.

Back in 2002, as we were brainstorming about ways to make snacks more novel and fun, someone

suggested that we print pop culture images on Pringles. It was a great idea, but how would we do it? One

of our researchers thought we should try ink-jetting pictures onto the potato dough, and she used the

printer in her office for a test run. (You can imagine her call to our computer help desk.) We quickly

realized that every crisp would have to be printed as it came out of frying, when it was still at a high

humidity and temperature. And somehow, wed have to produce sharp images, in multiple colors, even as

we printed thousands upon thousands of crisps each minute. Moreover, creating edible dyes that couldmeet these needs would require tremendous development.

Traditionally, we would have spent the bulk of our investment just on developing a workable process. An

internal team would have hooked up with an ink-jet printer company that could devise the process, and

then we would have entered into complex negotiations over the rights to use it.

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Instead, we created a technology brief that defined the problems we needed to solve, and we circulated it

throughout our global networks of individuals and institutions to discover if anyone in the world had a

ready-made solution. It was through our European network that we discovered a small bakery in Bologna,

Italy, run by a university professor who also manufactured baking equipment. He had invented an ink-jet

method for printing edible images on cakes and cookies that we rapidly adapted to solve our problem.This innovation has helped the North America Pringles business achieve double-digit growth over the

past two years.

From R&D to C&D

Most companies are still clinging to what we call the invention model, centered on a bricks-and-mortar

R&D infrastructure and the idea that their innovation must principally reside within their own four walls. To

be sure, these companies are increasingly trying to buttress their laboring R&D departments with

acquisitions, alliances, licensing, and selective innovation outsourcing. And theyre launching Skunk

Works, improving collaboration between marketing and R&D, tightening go-to-market criteria, and

strengthening product portfolio management.

But these are incremental changes, bandages on a broken model. Strong words, perhaps, but consider

the facts: Most mature companies have to create organic growth of 4% to 6% year in, year out. How are

they going to do it? For P&G, thats the equivalent of building a $4 billion business this year alone. Not

long ago, when companies were smaller and the world was less competitive, firms could rely on internal

R&D to drive that kind of growth. For generations, in fact, P&G created most of its phenomenal growth by

innovating from withinbuilding global research facilities and hiring and holding on to the best talent in

the world. That worked well when we were a $25 billion company; today, were an almost $70 billion

company.

By 2000, it was clear to us that our invent-it-ourselves model was not capable of sustaining high levels of

top-line growth. The explosion of new technologies was putting ever more pressure on our innovation

budgets. Our R&D productivity had leveled off, and our innovation success ratethe percentage of new

products that met financial objectiveshad stagnated at about 35%. Squeezed by nimble competitors,

flattening sales, lackluster new launches, and a quarterly earnings miss, we lost more than half our

market cap when our stock slid from $118 to $52 a share. Talk about a wake-up call.

The worlds innovation landscape had changed, yet we hadnt changed our own innovation model sinc ethe late 1980s, when we moved from a centralized approach to a globally networked internal model

what Christopher Bartlett and Sumantra Ghoshal call the transnational model in Managing Across

Borders.