SmartCo Gives its Smart & Final Stores Two Ways to Successfully Expand

Smart & Final has struggled to expand beyond its traditional territory, but the development of a new store type, one that recently debuted in Denver, has provided the retailer with two routes to geographic growth.

The new store goes by the name of SmartCo, and the first opened up in Denver proper in late June. A second launched on July 14 in suburban Aurora, Col., and a total of five are planned for the vicinity.

To developed SmartCo, Smart & Final conducted market research that identified consumer buying trends in the Denver region. It used the data to create new store format with a foundation derived from its bulk-product oriented Smart & Final stores, but one enhanced with conventional, natural and locally produced food to make the the store format more immediately attractive for everyday shopping.

The effort leaves Smart & Final with two critical advantages in expanding into territories where its namesake stores are unfamiliar. First, if the store concept proves successful, the retailer can use SmartCo as a growth vehicle. SmartCo stores are similar to standard grocery store operations, so they are easy to market and easy for consumers to understand, which should translate into significant consumer trial. Second, it used recently developed internal resources to develop a new store type. In doing so, Smart & Final developed a system that it apply to create entirely different formats if research in other markets suggests SmartCo would not be enthusiastically received.

With 250 or so namesake stores in Washington, California, Arizona and Nevada, Smart & Final is a major western retailer already, but it has had a tough time growing beyond its core territory. Founded to serve restaurants and other small businesses by providing bulk food, cleaning supplies, and other necessities, Smart & Final often identifies itself as a no-fee warehouse club to explain what it does. Traditionally, its stores have been placed to serve commercial customers. But many consumers -- often employees of Smart & Final commercial customers and their family and friends -- like the bulk-bargain value the products they carry represent. So, often enough, they and anyone else residing nearby who might resent the membership fees that Costco and Sam's Club charge become customers.

For that reason, Smart & Final refers to itself as a no-fee warehouse club. However, like warehouse clubs, traditional Smart & Final stores don't carry the range of everyday consumer needs, particularly food, that grocery stores stock. Nor do they carry discounted major purchase products such as flat screen televisions and furniture that draw middle class customers to warehouse clubs. Those limitations have proved an impediment to expansion even in core markets but particularly outside were consumers don't have the first clue about what Smart & Final is and why they should bother with its limited selection.

SmartCo is the latest manifestation of a Smart & Final strategy to expand its business to consumers first in core and then in new territories. Several years ago, in a bid to make itself more attractive to California consumers, Smart & Final developed a new store format that it dubbed Smart & Final extra. The company added 5,000 grocery items to the basic Smart & Final bulk product offering. The additional food made the extra stores less dependent on commercial customers and better suited for residential neighborhoods where consumers could shop them like a traditional grocery store.

In 2007, Smart & Final purchased Henry's Farmer's Market in California and Sun Harvest stores in Texas from Whole Foods Market (WFMI). In the aftermath, Smart & Final gained new knowledge about conventional and specialty food operations that it could use in its expansion plans.

SmartCo has become the first application of the knowledge. When finished with its Denver-area expansion effort, Smart & Final can tweak SmartCo for other new markets, but it also can develop significantly different store concepts if new territories require them.