For all its glamour and frill, Chanel chose to stage one of its Fall-Winter shows in a faux grocery store a few years back.

Rows of Chanel-branded pastas and cheeses lined the runway in Paris' Grand Palais as models strutted down in sparkly, pink tweed. Some even donned grocery baskets made with Chanel's signature leather-trimmed chain link, which were later sold for $12,500 apiece.

The concept, drawing from pop art, was the supermarket as a great equalizer. Women of any creed and demographic must shop under the same roof, walk the same aisles and choose from the same selection. The irony, of course, is glaring: peddling novelty items for $12,500 is hardly equalizing, even for the 1%.

Behind the Marie Antoinettian irony, though, lurks another misconception.

The great American supermarket is no longer the equalizer it once was. As the middle class continues to shrink, two new classes of grocery stores will emerge: one for affluent shoppers in urban locales that features experiential activities like wine tastings and restaurants inside; and another, not unlike grocery stores today, in more sprawling or rural markets with pick-up sites where customers can collect pre-ordered groceries after work.

Then, there is the expanding population that hovers just above or below the poverty line for whom dollar stores will reign supreme.

A 2015 study from Pew Research Center shows that while 62% of American households were middle-income in 1970, only 43% were 2014, while the upper and lower brackets gained.

The grocery store was perhaps an equalizer in 1970, when the majority of Americans shared a similar spending power, but that's no longer the case. Economists like Emmanuel Saez and Thomas Piketty predict that if public policy remains unchanged, the disparity between the well-heeled and the lower-income Americans will steepen in coming decades. 

As the retail landscape continues to adapt to these macroeconomic currents, worsened by the onslaught of e-commerce, there will be casualties. While Walmart Inc. (WMT) or Kroger Co. (KR) will brave the tides, smaller players will be swept away. Already, Southeastern Grocers, which owns the Winn-Dixie and Bi-Lo chains, as well as the parent company of Tops Friendly Markets, filed for bankruptcy in March. Sources say regional chains will be the next to go — and the clock is ticking.

Analysts at Morningstar Credit Ratings told TheStreet that the two most recent regional chain bankruptcies, Winn-Dixie and Bi-Lo, and Tops, have had troubles for awhile. Regional players lack the scale of their national counterparts and enough resources to gain it. 

While those regional players limp along, bigger firms like Walmart, Target Corp. (TGT) and Kroger are pouring funds into achieving scale aimed at keeping the cost of doing business low and margins high. They've got the means to invest in themselves, while regional chains do not.

To understand what lies ahead for the grocery sector within the next decade, TheStreet spoke with a dozen-plus sources, from real estate developers to big box analysts, all of whom largely agreed that the supermarket as a whole will not die, despite the mania created by Amazon.com Inc.'s (AMZN) $13.7 billion acquisition of Whole Foods Markets in 2017.

The landscape, however, will be radically different in the coming decade. While each purveyor has a distinct idea of the most pressing changes, there's no denying the rising competition as customers demand both convenience and low prices. Here's a glimpse into how these trends will play out.

Pickup for Online Orders

In the wake of Amazon's acquisition of Whole Foods, the scariest prospect for grocers was tackling delivery. Walmart, for instance, launched a handful of pilot programs last summer, and last-mile delivery startups like Instacart more than quadrupled the number of markets it serves.

However, the delivery buzz, according to Bernstein analyst Brandon Fletcher, is overblown. Sooner or later, he told TheStreet, the prices for delivery will rise as retailers need to make a profit. And when this happens, only a fixed segment of the population will be willing to pay for that convenience. The more popular alternative, then, is grocery pickup.

"The middle class already got split in two," he said. For people in the lower stratum, "the incredible convenience of delivery is not worth the high price. The largest piece of pie then is small, standalone stations purposefully built to be micro-distribution centers."

Imagine compact warehouses with a drive-through serviced by one or two store associates. The customer has already placed the order online, a mix of both fresh and nonperishable items, choosing one of several locations for pickup on the same day. On her way home from work, she pulls into the center and is greeted by an employee, who retrieves her package. Still at the site, she has a moment to look through her order. If there's a mistake, the employee handles it in real time.

"Right now, there does seem to be a focus on delivery," said Telsey Advisory Group analyst Joe Feldman. "Grocers will probably adjust in a few years given the demands of shipping costs."

More than a handful of grocers — including Walmart, Target and Kroger — already have store pickup, and these services don't have the same fees as grocery delivery, though there may be a price minimum. Retailers could further convince shoppers to opt for pickup instead of delivery, Feldman said, by offering lower prices on certain goods.

Walmart, in fact, is trying out "pickup towers," a spot outside of a store, at one location in its hometown of Bentonville, Ark. "We continually test new ways to use this type of technology," a company spokesperson told TheStreet.

Wine Tastings and Cooking Classes 

Pickup centers can nonetheless coexist with brick-and-mortar locations. While certain retailers will no doubt reckon with the oversupply of physical grocery stores, remaining storefronts will cater to shoppers' desire for experience. These stores, multiple sources said, will be destinations.

"There will be another version of the supermarket that will still be a store, but it will be extremely nice: cooking lessons, a wine bar. In 10 years, it would not be bizarre for a friend to call you and say, 'Hey, let's go to the Harris Teeter [a Kroger subsidiary],'" Fletcher said, pointing to an episode of Gilmore Girls, the popular TV show from the early 2000's, in which Lorelai and her love interest, Jason, have a date at a local grocery store.

"It'll be a common date in the future," he added. "You'll have food, you'll have wine, and maybe you'll pick up some groceries in the meantime."

These fancy supermarkets may also have "stores within the store," according to Forrester analyst Sucharita Mulpuru-Kodali, who describes a scene in which vendors will have their own space within a large supermarket — a glorified version of Costco Wholesale Corp.  (COST) , where instead of hair-netted workers handing out samples of grilled shrimp, it'll be a like a farmers' market: fresh, organic products that tout wellness and sustainability.

The excursion-friendly grocers can be located in shopping centers and emphasize specialty or prepared foods that consumers wouldn't be able to find elsewhere, said David Dixon, a vice president at design firm Stantec. Think Trader Joe's microwavable meals, freshly ground peanut butter from an upscale player, or Eataly: the Lidia Bastianich-backed Italian food hall concept, where customers can buy gourmet pasta, sit down for a bona fide Italian meal or grab a happy hour drink. 

Bastianich told TheStreet that food halls are thriving because customers not only love what they offer, but they serve up an element of sociability that's popular with many shoppers who enjoy dining at a place like Eataly.

Apartment Complexes With a Grocery Store

As the middle class continues to evolve, those who move into higher-earning-power status are also heading to cities. 

U.S. Census data shows that the 2016 median household income was $55,322. In cities experiencing large inflows of young professionals, though, the median incomes were notably higher. In Washington, D.C., for example, it was $75,628; in Portland, $82,734. These urban dwellers, in turn, are driving a demand for convenient grocers in walkable locations, often within large housing developments, Dixon said. The demand for dense multifamily housing with ground-floor retail anchored by a big box grocer is unmet. In the context of a mixed-used development, grocery stores are viewed more as an amenity than a separate necessity.

"The motive to bring them in is not to provide the food a neighborhood needs," Dixon added. "It's to provide amenities."

In turn, landlords can charge 25% more for rentals close to — or on top of — a Whole Foods, Dixon told TheStreet. And for what it's worth, Target and Whole Foods look to be the very top of the list for developers of these urban, mixed-use properties. 

Already, retailers like Target have found success opening small-format stores in New York City. Target plans to debut three more in the city as part of its plan to operate 130 pint-size storefronts by the end of 2019.

Morningstar said Target, along with Trader Joe's and Whole Foods, will always be the names that come up in the mixed-use, urban landscapes, but they're just a handful of constituents of a growing list. Edward Dittmer, senior vice president of Morningstar Credit Ratings Services, noted that Wegmans "does a very good job" at attracting the higher-end customer.

Dittmer said it's easy to see how Wegmans, a regional East Coast chain that's attracted a cultlike following, focuses on high-margin products to stay afloat in the competition with the big chains. Its bread and butter, if you will, is fresh food, prepared foods and bakery items that can help cushion the bottom line in an historically low-margin industry.

As for where these new developments are going, "It's a lot of Southern development," Fletcher said, in cities such as Dallas, Atlanta and Phoenix, which were once "fantastic, classic suburban" locales that are now morphing into millennial-populated miniature cities with suburbs shrinking on all sides.

Fletcher pointed to the Angelika Theater in Dallas, where someone who hasn't been there in a decade may not recognize it at all today. "You'll see a Whole Foods in what used to be a burned-out ghetto 15 years ago," Fletcher said. "Now it's got a SoulCycle [an upscale fitness club]."

Stores With the Lowest Prices 

Most telling of grocery shopping's diverging shifts in the face of American inequality is the rise of dollar stores. For instance, Dollar General Corp. (DG) , which caters nearly exclusively to low-income shoppers in rural areas, has seen its stock price rise more than 60% since the end of 2015. As of March 2, 2018, Dollar General operated 14,609 retail stores in 44 states.

Serving markets so remote that the nearest Walmart could be 50 miles away, Dollar General's more than 14,000 stores made double the profit of Macy's Inc. (M) last year and has a bigger market cap than Kroger, which plans to open 900 new stores this year.

The more suburban-centric Dollar Tree Inc. (DLTR)  has also thrived. Shares have climbed more than 30% in the same period. As of Feb. 3, 2018, Dollar Tree operated 14,835 stores in 48 states.

While a typical dollar store may not have a large selection of produce, if at all, more have begun selling frozen foods. Even in locales with a regional supermarket, customers may prefer a dollar store for its budget-conscious prices, Mulpuru-Kodali said. "These are very price-sensitive markets, and whoever can offer the lowest price will shake out everyone else."

Meanwhile, the middle class remains in limbo, shrinking and spreading in two opposite directions every year. The middle-class aggregate income fell from 62% of the total U.S. population in 1970 to 43% in 2014. During that time, aggregate income has skewed more and more toward the top: in 2014, nearly half of the country's aggregate earnings went to upper-income households, up from 29% in 1970.

At the same time, lower-income households lost 1% of their share of the total income from 1970 to 2014, from 10% of aggregate income to 9% now. 

The regional chains' struggle is twofold, then, as the middle class shrinks: first, they must compete with high-end big-spending companies on the upper end of the income spectrum; and second, they must compete with incredibly price-sensitive dollar stores. 

While Target, Whole Foods and even Trader Joe's have dominated high-earning markets, dollar stores are increasingly cutting into the lower-income, more suburban markets by growing their offerings and charging lower prices. 

Winners and Losers

And who is everyone else? Not Walmart. Not Amazon. "Kroger and Target are probably immune," Fletcher said, "but literally everyone is at risk."

The carnage is already underway. Before the Florida-based Southeastern Grocers and Tops declared bankruptcy in March, a handful of smaller chains were in the weeds, including the private-equity-backed Marsh and Central Grocers Cooperate, a retailer serving the Chicago market.

"It definitely feels like the competition has heightened over the past three years," Feldman said, pointing to the entry of European players like Lidl as well as the rise of the privately held Trader Joe's. These retailers pressured Walmart and Kroger to lower their prices, while regional players like Tops, whose stores are primarily in the Northeast, couldn't afford to do so.

These smaller, more nimble chains have excelled at carrying minimal products with high brand affinity, according to Morningstar Credit Ratings' CMBS experts, and this has won them higher market share.

Since 1988, according to Morningstar's vice president of CMBS Steve Jellinek, traditional supermarkets' share in the sector has decreased from 90% to 44%, while the newcomers like Trader Joe's has gone from 2% market share to 40%.

There's no real way to pinpoint how many traditional supermarkets could go under as the sector evolves, but Morningstar's Dittmer offered his take.

"You're just going to see this bifurcation in the market," he said. He added that mass marketers, such as Target and Walmart, will occupy one end of the spectrum, focusing on logistics and supply-chain advantages. On the other end will be higher-end experiential stores that have the money and the margins to invest in things like smart data to ensure the customer gets what they expect every time.

That's not to say today's giants are necessarily classified as traditional supermarkets. Walmart did not become a national presence until the 1990s. And a decade from now, Fletcher said, Walmart will be among the standing.

"At some point, there will only be three main grocery retailers, depending on who has the buying power and online horsepower now," he said. "It'll be Walmart, Amazon, and probably Alibaba."

Alibaba Group Holding Ltd. (BABA) , a Chinese e-commerce behemoth, will likely partner with another major retailer — perhaps Target or Kroger — to take on Amazon in the American grocery space. Tech companies like Alibaba has the digital know-how that a more straightforward retailer like Kroger would need to compete, Fletcher argued, and Kroger's nearly 3,000 stores gives Alibaba a physical presence in the States.

"We do not have anything in the U.S. market at this time in grocery, other than sourcing from brands here for our physical and online operations in China," an Alibaba spokesperson told TheStreet.

Consolidation, Fletcher added, is inevitable. And that means the 21,000-some fragmented, family-owned or independent grocery stores in the U.S. are the worst positioned to brave the changes alone. Already, Walmart and Amazon are powerhouse stocks, primed for further growth. Walmart has raised its dividend for years in a row. For investors looking for a long-term hold in the grocery space, these companies are no doubt the best bets. 

Unlike Walmart and the dollar stores, the future is less certain for Kroger. As the country's largest supermarket chain by revenue, Kroger probably isn't going away any time soon. Yet in the face of heightened competition from Walmart and Amazon alike, the Cincinnati-based retailer has lost steam in recent years. Since 2016, its shares have dropped more than 35%.

"As companies like Trader Joe's are still growing, Kroger will have to consolidate and acquire more regional players," Mulpuru-Kodali said, "maybe weaker players like [the Dutch Ahold Delhaize-backed] Food Lion have yet to differentiate and have been around for decades."

Overall, though, the analysts are bullish on the grocery retailers.

"We need to eat," added Mulpuru-Kodali, "and it seems like grocers for the most part have finally caught on to what consumers want from them."

Amazon is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AMZN? Learn more now.

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