Supercenters, clubs reshaping U.S. grocery store business

Discount Store News, March 17, 1997 by Mike Troy

CHICAGO -- It's 4 p.m., and you still don't know what's for dinner. Welcome to the club. Neither does 40% of the nation's population.

That's a huge market, and it's why super-centers and clubs are reshaping the grocery industry and eyeing the home meal replacement market as a dynamic new business, according to industry leaders who headlined the fourth annual Supercenters and Clubs '97 Conference last month.

Among the key points raised at the conference, which was sponsored by DSN, were:

* Onestop shopping. Supercenters and clubs look for ways to draw greater numbers of consumers as time becomes a more important component in the price/value equation.

* Although the overall unit growth of membership warehouse clubs has slowed, the financial performance of the major club retailers -- Costco, Sam's Club and BJs -- has improved. Costco is unrivaled in its perishables department.

* The operation and merchandising of perishable departments, once viewed as a weak point for super center and club operators, now compares favorably to the best supermarket operators.

* The home meal replacement phenomenon remains a major, but untapped, opportunity for super-center and club operators. Widespread experimentation is expected as operators address price, quality and merchandising unknowns.

* Hardest hit by the continued growth of supercenters and improving club performance will be less than efficient regional supermarket chains. The major operators will seek to leverage their expense structures through acquisitions.

With the supercenter emerging as a powerfully influential force in food merchandising today, it appears to be not so much a question of if, but when, Wal-Mart becomes the nation's largest grocer, several speakers noted.

"We will open 100-plus supercenters indefinitely into the future," Wal-Mart's executive vp of supercenters Nick White told conference attendees. Maryland, Ohio, Michigan and Iowa are new states where supercenters will open during 1997. Two new food distribution centers will also be opened in addition to the five that already exist. According to White, the new DCs, located in Pageland, S.C., and Olney, Ill., are capable of serving as many as 90 supercenters within a 300-mile radius. The 24-year Wal-Mart veteran also noted that the challenge of obtaining site a approval for 200,000 sq.-ft. boxes and the demographics of smaller markets has led to the development of smaller-format supercenters.

"[We have] a 109,000-sq.-ft. prototype that gives us the opportunity to go into a tremendous number of communities that are not presently served by Wal-Mart. There are five on the street today, and 10 more will be opening in 1997," White said. Wal-Mart will continue to experiment with other prototypes, but most of its new stores will be 188,000 sq. ft., 167,000 sq. ft. or 136,000 sq. ft., White said.

A small-format supercenter is also being eyed as a growth vehicle at Kmart. According to Super Kmart Center president Ron Floto, Kmart is developing a 120,000-sq.-ft. supercenter prototype that will allow 50 of its traditional discount stores to be converted. The company also operates 179,000-sq.-ft. and 146,000-sq.-ft. prototypes. By 1999, Floto said between 15 and 20 Super Ks may be opened annually.

"We have made a lot of progress over the past few years. We have gone from being on the brink in the fall of 1995 to having an extremely solid balance sheet. Our goal is to regain our investment grade rating, which we will be able to do within the next 18 months," Floto told attendees.

One way that is being achieved is through a shift to what Kmart calls its high-frequency for mat that emphasizes consumables (known as the Pantry), kids and categories for the home.

"Our frequency of visits is less than Target's and substantially less than Wal-Mart's, but our market baskets are about the same," Floto said. By increasing the frequency of visits, Kmart expects to grow its sales per square foot. The numbers have begun to creep ahead, from $180 per square foot two years ago to just over $200 per square foot today. Kmart's goal is $240.

With the high-frequency format serving as Kmart's foundation, Floto expects Super K openings to accelerate to between 15 and 20 units annually by 1999.

"Our growth in the future will be much more concentrated geographically in the Southeast and the Great Lakes region," Floto said. "Our strategy today is to use produce as the signature perishable department."

When it comes to perishables, no one comes close to Costco, according to James Degen, who annually authors a report that has become the authoritative source of club and supercenter information. He uses words like "mind-blowing" and "beautiful" to describe Costco's perishables department.

"Costco continues to lead the entire industry in growth and in creativity to experiment with new products and services that are in response to member demand," Degen said. "BJ's is the smallest competitor but a strong performer in until expansion, as well as financial performance."