Lunds goes after growth in a high-end niche with new concept store

The Lunds and Byerly's Kitchen in Wayzata is like nothing the grocery company has done before.

About a third of the size of a conventional grocery store, Lunds and Byerly's Kitchen focuses on prepared foods and features a large restaurant complete with beer and wine. The hybrid store opened last month, and more are likely if it succeeds.

The "kitchen" is part of a growth story at Edina-based Lund Food Holdings that has run counter to the relative hard times in recent years at Twin Cities' other traditional grocery chains, Cub Foods and Rainbow Foods.

Lunds has opened new stores and increased market share, thriving in a higher-income niche. Cub and Rainbow have been caught in the middle, losing business to low-price chains like Wal-Mart and Target.

"Lunds has been executing well," said David Livingston, a Wisconsin-based supermarket industry analyst. "They have differentiated themselves and given people a compelling reason to come to their stores."

The company plans to open a new Lunds supermarket — its 13th — next month in downtown St. Paul. But perhaps its most interesting project right now is Lunds and Byerly's Kitchen, which combines the names of Lunds' two Twin Cities chains.

It's got some grocery basics, but beverages and produce stand out. There's a cheese shop and butcher's counter too. But much of its 17,000 square feet is devoted to prepared food, from sandwiches to sushi to scads of hot dishes and salads, all made on site.

"This is a chance to push the food service envelope, " said CEO Tres Lund, whose grandfather founded Lunds 75 years ago. "Everything here is geared toward packaged food to go, " he said as he walked through Lunds and Byerly's Kitchen. "It's really geared toward dine in and takeout."

About 4,000 square feet of the store is taken up by a 143-seat restaurant. Diners order from a menu via an iPad, or buy prepared food from various stations in the grocery store and eat it in the restaurant. The bar has 30 beers and 65 varieties of wine.

"It's unusual, " said John Dean, a Twin Cities supermarket consultant. "Most grocers have enough trouble keeping their heads above water, and don't push into that sort of thing. It's hard enough to sell groceries."

It's not that uncommon for grocery stores to have restaurants; Byerly's in Golden Valley has one. But outlets with restaurants tend be full-scale supermarkets of 50,000 square feet or so, not a boutique grocery. In other words, food service is secondary, which is not the case at Lunds and Byerly's Kitchen.

A large Lunds supermarket is just a few blocks away in Wayzata, but Tres Lund said the two outlets' missions don't really overlap.

Wayzata is the testing ground for Lunds and Byerly's Kitchen. "We're going to spend a number of months just watching how things play out," Lund said. "If this works, there's a number of different places we could take it in this market."

Lund declined to disclose the company's investment in the new kitchen concept. The privately held company, owned by the Lund family, also does not divulge sales.

Lunds provided data from Nielsen Co. showing that Lunds and Byerly's together have an 8.85 percent share of the Twin Cities grocery market, up from 6.88 percent in 2010.

While Lunds competes with Cub and Rainbow, it goes head-to-head with other higher-end chains, notably Kowalski's and Whole Foods, which is expanding in the Twin Cities.

The competition will heat up more when Des Moines-based Hy-Vee enters the market with four to six stores, which are also slated to have bar service. Hy-Vee announced its Twin Cities foray in February.

Lunds opened a new store in downtown Minneapolis in 2012. It bought a Village Market in Prior Lake last fall and converted it to a Lunds. More growth is on tap.

"There are more areas of geographic coverage we'd love to have in the Twin Cities," Lund said. "It's safe to say we'll build one store a year in the next five years."

Meanwhile, Rainbow has been in retreat, closing five of its 32 Twin Cities supermarkets in the past 14 months. Cub, the Twin Cities' largest grocery chain, has managed to keep all of its stores open, but it has progressively lost market share.

Cub and Rainbow have the misfortune of being in the middle of a grocery market that is increasingly gravitating toward low-price models on one end, high-quality, high-touch service on the other. Lunds fits into the latter, which is also a higher-price model.

Lunds, Livingston said, "is for people who are just a little more serious about food and are a little more particular about what they buy."

Mike Hughlett • 612-673-7003