Supercenters gain momentum: price keeps eroding old-market loyalty - Annual Industry Report Top 150: Food & Consumables

DSN Retailing Today, July 7, 2003 by Mike Duff

Today's food options are broader than ever, as non-traditional channels ranging from dollar stores to drug chains to home specialists have added significant food assortments. And although each may have a different focus, they all have positioned themselves as alternatives to the conventional channels of food sales, primarily supermarkets. This all comes as supermarkets themselves began acknowledging they would have to make significant changes in how they address the marketplace if they hope to maintain a central position in food retailing.

Supermarkets began to re-evaluate their pricing and analyze where to concentrate marketing, merchandising and assortment in order to establish an effective competition posture versus the mass-market retailers, which have effectively developed their own food and consumables businesses.

Comparing edibles sales between different channels of trade can provoke dispute. Some supermarket analysts like to contend that Kroger's supermarket division exceeds food sales at Wal-Mart's supercenters. Others might call that a pretty dramatic dodge to escape the reality of the market.

Kroger's supermarket division includes multiple formats, indicating both that the argument is spurious and that Kroger, at least, has acknowledged an important development: that consumers are seeking formats that best suits their needs. The truth of that assertion can be seen not only in the success of alternative channels of trade, but within the supermarket arena itself, where specialized formats such as Whole Food Markets and Say-A-Center have enjoyed success.

A look at store growth can offer a sense of how the food retailing landscape has changed over the past few years. In the previous four fiscal years, Wal-Mart has gone from 721 supercenters to 1,258. During that period, the company's Sam's division grew from 462 to 525 clubs, while Neighborhood Market went from seven to 49. Thus, those Wal-Mart banners that devote the more significant proportion of their business to food gained 53.9%.

At Costco, in the four years ending Dec. 31, 2002, a figure that doesn't correspond to the company's fiscal year but is within a month of the Wal-Mart and Kroger annum ends, store count went from 230 to 304 clubs in the United States, or a gain of 32.2%.

By fiscal 1999's end, when it had absorbed 781 supermarkets and multi-department stores in its acquisition of Fred Meyer, Kroger controlled 2,289 supermarkets and multi-department stores, as well as 796 convenience stores and 389 fine jewelry stores. By the end of its last fiscal year on Feb. 1, Kroger operated 2,488 supermarkets and multi-department stores, as well as 784 convenience stores and 441 fine jewelry stores. Discounting the jewelry stores, Kroger gained 6.1% in store terms during the period. Among those formats that compete most directly with supercenters and clubs--including the supermarkets and multi-department stores--Kroger gained 8.7% in store terms.

In the 1980s, warehouse clubs laid the foundation for change in food retailing. Since the late 1990s, Wal-Mart, more than any other company, has forced supermarket operators to begin changing their behavior. Although it has slashed its supercenter commitment, Kmart helped pave the way when it launched the format in the late '80s. Wal-Mart and Target followed suit, and traditional supercenter operators Meijer and Fred Meyer joined their expansion efforts to a limited extent.

Even as Wal-Mart and the others began to expand the supercenter format beyond its traditional range in the Pacific Northwest, Michigan and southern Louisiana, supermarket reaction was slow. Marketing and merchandising of food and general merchandise were secondary considerations among operators that often claimed their real estate was their primary business. With the advent of supercenters, a new force entered the market that focused on the marketing and merchandising of food and consumables. And now super-centers are driving the evolution of food retailing.

As the largest supermarket operator, Kroger has been credited with making moves and having the financial strength to best withstand the super-center/club onslaught. Other supermarket operators are having a rougher time. Lehman Bros. analyst Meredith Adler noted in a recent research note that Safeway is eliminating 940 of 7,000 jobs at its corporate and regional office. The initiative translates as 13.4% decrease of the corporate workforce--or 10% if 252 unfilled positions are ignored--in response to a "tough environment, which SWY is finally acknowledging," she stated.

She also pointed out that Albertsons--which already has retrenched, leaving vulnerable markets while pinning its hopes for growth on its combo-store format--also is showing the effects of competition in missing Lehman Bros.'s lowered first quarter earnings per share.

All that taken with the troubles at Ahold, a supermarket innovator that has run into financial and legal problems arising from faulty accounting, and it is difficult to see how supermarkets are going to reassert themselves in the United States.