Small grocers have to be distinctive to stay in business because...

people eat out more, and consume food at home less. Or they want to purchase already prepared items and eat them at home (called "home meal replacement" in the industry). Or the grocer has to have specialities that make the store distinctive and a destination (i.e., butcher, seafood counter, great specialty food or beverage selections, etc.).

Also see "Small grocers battle to stay alive in Sacramento area" from the Sacramento Bee.

From the article:

... The place hasn't changed much since then. An attended meat case anchors the store. A small produce section in one corner has a little bit of everything in season, from asparagus to zucchini. The black-and-white floor is clean but worn in spots from years of traffic. The store handles between 500 and 700 transactions per day, according to the owners.

"There's a danger for some older places when a big company decides they can capture a region," said Long Beach-based retail expert Bob Phibbs. "No one wants to shop in a dingy place, especially for food."

Sometimes competition spurs independents to reinvent themselves. Nugget Market, the 82-year-old chain based in Woodland, operated four nondescript grocery stores before making an industrywide splash in 2000 with its contemporary European market format.

Today the company has eight swank stores and a national reputation as an innovator offering everything from custom-ground sausage to store-made pasta and pizza. Fortune has ranked Nugget among the "100 Best Companies to Work For" the past three years.

"Independents are more nimble when it comes to new ideas," said Food King owner Valen Lee, who noted that his family's Galt store nearly 40 years ago was the first to offer Chinese takeout. "Ethnically diverse foods, gourmet groceries, sushi – those all began with independents. The chains just have more money to make it flashy."

Check out the photos from the Nugget Market webpage on the opening of a new market in El Dorado Hills. Other companies that do similar things include Zupans Markets in Portland.