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Conditions ease -- tactics toughen.

After battling the storms of inflation and recession for most of the past decade, the food distribution industry encountered relatively calm conditions in 1983. The economy turned healthy, food store prices remained quite stable, and many ongoing problems eased considerably.

The improved climate did not appreciably affect merchandising policies and programs, however. Most grocers continued to operate as though nothing had changed, using the same lowball tools and tactics as before.

Judging from last year's actions, the industry is either unwilling or unable to extricate itself from price-based competition. Store owners and managers report that ever-hotter specials, double-or-more-value couponing, and other price-reducing devices were used increasingly in all sections of the country and every type of trading area. And no letup is in sight. Decision-making chain and wholesale executives predict even more of the same for the months ahead.

The rock-bottom approach may have been effective to help consumers fight inflation when that was rampant, and to help them stretch their budgets when recessions hit. The question must be asked, however, whether it still a proper strategy when times are good and customers are less worried.

In any event, consumers spent a smaller-then-ever portion of their disposable income for food-at-home last year--11.4%. The low expenditure is, of course, largely a result of bargains at the supermarket. Our industry can be proud of that record. It is certainly a magnificent accomplishment, unmatched anywhere in the world, that Americans need spend so little to eat so well.

Nevertheless, it has to be a matter of concern that grocery stores are getting a steadily shrinking share of after-tax dollars. Unless the trend is stemmed, the industry's overall health can only worsen. But current selling methods aren't likely to do the trick. Instead, the situation calls for positive and constructive merchandising and advertising steps to encourage trading up by consumers and stimulate "real" growth through additional purchases.

Progress toward that end will require extensive conceptual and procedural cooperation among all elements of the food business. Fully integrated, large scale programs involving manufacturers, distributors, and retailers won't take shape overnight. However, there were definite signs last year that trade relations are improving, which means a stronger foundation is being established for purposeful teamwork.

Helping to bring the industry together is the universal desire to improve productivity. It is generally recognized that many existing inefficiencies cannot be dealt with by individual firms, or even individual industry segments. As Dr. Gordon Bloom of M.I.T. has pointed out, they are system diseconomies which demand broad industry cooperation for solution.

In that respect, we note a growing--though still small--tendency to view the food distribution industry as a single, interrelated system. This is a very compelling premise, offering hope for eliminating systemic redundancies and maximizing efficiency throughout the channel. It will be interesting to see how soon the total system concept moves out of the conversation stage.

Meanwhile, paradoxically, some of the most popular recent movements in the industry actually diminish productivity. These include such extra-labor-requiring practices as 24-hour and Sunday operations; the addition of bakeries, delis, salad bars, and other service departments; and the trade-off of fast-moving low gross items for slower moving high gross merchandise, including non-foods.

The explanation offered by Dr. Bloom is that high productivity does not necessarily bring high market share or optimum profitability. Since the ultimate goal of management is not physical efficiency--but, rather, financial efficiency that shows up on the bottom line--productivity per se may sometimes have to be subordinated to a larger objective.

At the warehouse level, productivity is being depressed by the proliferation of deal merchandise. Forward buying is widely used by retailers as a means of staying competitive. The result is that distribution facilities are becoming warehouses. Many companies are forced to use public warehouses for overstock, necessitating costly rehandling of product. For all that, dealing continues to increase. When the full ramifications of this excessive usage become clear to all concerned, perhaps a more rational merchandising process may evolve.

Though last year produced few substantive changes in operating philosophy, it did bring about a mrked improvement in the industry's confidence level. Coming into 1984, management was much less uneasy about energy costs, labor costs, generating capital internally to support growth, local economic conditions, and a variety of other problems. In only one area did they feel more apprehensive.

The single exception was price warfare. Abnormally high price skirmishing is anticipated for the industry as a whole. Cutthroat pricing is expected to become more prevalent in head-to-head competition. In line with this prospect, the consensus is that food retailing profits may worsen somewhat this year. On the other hand, again reflecting individual composure, most grocers expect their own companies' profits to improve.

Another confidence builder is a growing belief that the balance of power is shifting away from manufacturers and toward the distribution side. Obviously, any pronounced change in the existing status would have far reaching consequences in areas ranging from merchandising teamwork to potential adoption of the total system concept.

Whether the pendulum is, in fact, swinging remains to be determined. A more immediate question, we think, is the balance of power between the supermarket industry as a totality and other industries competing for the consumer's dollar. Concerted action to reverse the downward trend of spending for food-at-home deserves priority attention.

The year ahead promises to be reasonably crisis free, especially if alternatives to brutal price battling can be found. The economic and operating climate for food stores is generally thought to be more favorable than in the recent past. Superior electronic equipment, innovative store formats, and unique customer services provide good opportunities for progress. Grocers are therefore quite properly looking to the future with considerable hope--but, as usual, with few illusions.
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Publication:Progressive Grocer
Article Type:editorial
Date:Apr 1, 1984
Words:956
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