Supermarkets fight back: new formats, pricing strategies attract shoppers, broaden appeal

Discount Store News, May 6, 1996

Jack Engle of Fultonville, N.Y., recently purchased his Easter ham at the local Super Kmart Center in Amsterdam, N.Y. He not only received a free chicken breast with his purchase, but picked up a pair of sweat pants, too.

"I like being able to get a bunch of things I need and just go to one checkout," Engle said.

He's not alone in his appreciation of the one-stop shopping world of supercenters. Supercenters, such as the one he visited, are ringing up sales in the $40 million to $70 million per unit range, about half of that in food. By the year 2000, supercenter sales will total $81.8 billion, according to industry consultant James Degen of James M. Degen & Co., up from $26.3 billion in 1995. Store counts in that period should rise from 592 units in 1995 to 1,635 units by decade's end.

Obviously, those numbers pale in comparison to the mammoth supermarket industry. However, the composition of a supercenter's merchandise mix, hard lines and soft lines including apparel, is a formidable competitive weapon. These departments attract shoppers and help the discounters ring up 30% to 50% more sales in general merchandise categories--their profit centers--than they do at their traditional discount stores. Customers, too, are attracted to the many shopping opportunities afforded in a supercenter since convenience wins out in their time-pressed schedules.

In many rural communities in which Wal-Mart has planted its supercenter, weak supermarket operators have gone out of business due to their inability to change and compete against the market-savvy retail giant. Currently, sources estimate that each supercenter affects about five supermarkets in its operating area. Approximately 10% of the nation's nearly 30,000 supermarkets are impacted by a supercenter.

The nation's supermarkets, a market-savvy bunch, too, especially with the industry's do-or-die category, fresh foods, aren't going to let supercenters steal their shoppers without a fight. In response, many supermarket chains are using tactics such as slashing prices, enriching service departments, upgrading private labels, taking a market niche position or incorporating frequent-shopper programs to keep customers coming to their doors. They also are working hard at keeping their market dominance in fresh food, the bellwether area in food retailing.

"You just have to learn how to do a better job of running the business. There's life after a supercenter comes to town," said Robert Smith, chairman of Fleming Cos., Oklahoma City. "Those who close do so because of an inability to change."

David Rogers, president of DSR Marketing Systems, agreed there are actions to take. "There are strategies food stores can adopt, such as upgrading or expanding stores. Supercenters are not going to dominate the industry," he said. "They can pick their best shots."

Tom Rubel, a managing partner with Management Horizons, Columbus, Ohio, added, "Supermarkets are finding that they don't have to be all things to all people. They can focus on exactly what kind of consumers they want."

Many supermarkets have enacted plans to shore up their position in the market in light of supercenter encroachment or as a preemptive strike before the behemoths come to town.

In Amsterdam, N.Y., where Engle shops, for example, local supermarket chain Price Chopper opened a large, 65,000-sq.-ft. combination unit near the Super K, replacing a smaller, older unit.

Realizing it can't always fight Wal-Mart with a new store, however, Price Chopper has started upgrading and accentuating its service departments, according to Joanne Gage, spokeswoman for the Schnectady, N.Y.-based chain. "We're stressing our produce, deli and seafood to name a few areas, and it has worked well," she said, adding that those departments have not been Kmart's or Wal-Mart's areas of expertise. When appropriate, Price Chopper adds home delivery. Initially, said Gage, stores see a dip in sales when the supercenters debut, "but customers come back after initial curiosity."

Industry watchers agree that Price Chopper has been successful in halting Super K from taking a large chunk of its business in markets such as Amsterdam and Rome, N.Y., where it also clashes with a Wal-Mart Supercenter. Wal-Mart has gone to great lengths to position itself as a local, hometown operator with its 1-year-old micro-marketing program.

Another competitor, Hannaford Bros., estimated that its own efforts to lower margins in competing markets, coupled with Price Chopper's actions, dampened Super K's debut. At a Food Marketing Institute Meeting last summer, Hannaford's Ron Hodge, senior vp, operations for the Albany, N.Y., area, said, "The chain is upgrading our stores, building new ones, and we haven't backed away from a price fight. We significantly lowered margins in Amsterdam long before Kmart entered the marketplace at higher gross margin levels than we had established before they arrived. This probably blunted their impact."

At Ukrop's Super Markets, Richmond, Va., ready-to-cook seafood entrees are making a splash and providing the chain with a competitive edge against supercenter operators. Supercenters, however, are offering prepared-meal options, following the lead of the supermarkets. Many of the offerings, however, are not as elaborate as those forwarded by the grocery chains. Ukrop's offers such entrees as salmon in dill sauce and flounder in cheese sauce, priced $6.99 and $8.99, respectively.