Supercenters challenge the supermarket industry

Business Wire, Nov 21, 1994

NEW YORK--(BUSINESS WIRE)--Nov. 21, 1994--A recent special report, published by Supermarket News with contributions from Management Horizons, a consulting division of Price Waterhouse LLP, predicts that supercenters will capture 10% of total food sales and 25% of general merchandise sales by the year 2000.

"We have witnessed explosive growth for food/general merchandise format stores between the years 1990 and 1993 -- 40% increase in number of stores and a 70% increase in sales dollars," said David Merrefield, Supermarket News executive editor and associate publisher. "According to research we conducted with Management Horizons, the U.S. supercenter industry is predicted to reach $100 billion in sales by the end of the decade as leading discounters jump into the fray. Nearly 40% of that dollar volume is projected to come from grocery sales."

For retailers planning entry into this fast-growing channel, the capital investment is not insignificant. Management Horizons calculates that $11.2 million is required to construct a new 160,000 square foot supercenter and approximately $8.6 million to convert an existing discount store.

What level of sales must a supercenter generate in order to be profitable to a parent company? In its annual list of High Performance Retailers, Management Horizons has established 25% as an appropriate pre-tax return on investment (ROI). To achieve that pretax ROI, the EBIT (earnings before interest and taxes) would need to be $2.8 million for a new supercenter and $2.15 million for a converted supercenter in the first year. That translates to an annual sales volume of $56 million per supercenter.

To reach that level of sales volume means, (among other things) attracting customers at a time when people are shopping less frequently. However, consumers are shopping with greater efficiency and embracing alternative store formats such as warehouse clubs and deep-discount drug stores. This may indicate that supercenters are arriving at the right time.

"Getting consumers to cross-shop the store and purchase higher margin fashion and hard lines is critical to the success of a supercenter," explained Tom Rubel, managing partner, Management Horizons. "We have found through our customer focus group research that the key drivers for supercenter shoppers are price and one-stop shopping. For retailers this means offering price-matching to customers as well as developing a "user-friendly" floor lay-out so key merchandise categories aren't missed."

Supermarket News, one of the Fairchild Publications, is a weekly magazine serving supermarket retailers and their suppliers. Fairchild Publications, founded 1892, is part of Capital Cities/ABC Inc. The company is based in New York and has 18 worldwide bureaus from which it publishes W, Women's Wear Daily, Footwear News, DNR, HFD, Sportstyle, Golf Pro and Supermarket News, Children's Business, Fashion Business, Fashion Internationale and Salon News.

Management Horizons is a management consulting and market research firm specializing in the retailing and consumer goods distribution industries. It is part of the Price Waterhouse Retail Industry Practice which combines the firm's auditing, tax and business advisory services, with the comprehensive consulting services of Management Horizons targeted to retail and consumer goods. The price Waterhouse Retail Industry Practice is, in turn, an industry specialty group within Price Waterhouse LLP which serves a broad range of clients through 106 offices across the U.S.

Fairchild Publications and Management Horizons have joined forces to create a series of special reports focusing on the full spectrum of industries covered by Fairchild. Combining the editorial expertise of Fairchild with the research resources of Management Horizons, the reports will take in-depth looks at the industries and the trends that affect both retailers and suppliers in them. If you would like a copy of "Supercenters" please contact Kathryn Cordes at 212/596-5551.

CONTACT: Price Waterhouse LLP

Kathryn Cordes, 212/596-5551