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Dealing with the mass merchants.

In case you needed any hard evidence that Wal-Mart represents a real danger to your business, Ken Stone has it. Stone, an economics professor at Iowa State University, Ames, Iowa, has done extensive studies on the impact of Bentonville, Ark.-based Wal-Mart on other retailers, including supermarkets, and his conclusions aren't pretty.

In 30 Iowa towns where Mal-Mart set up shop, supermarket sales declined by 6.4% on average after one year, 3.2% after three years and 1.8% after five years. On the other hand, in towns with no Wal-Mart, food sales climbed 2.4% after the first year, 3.4% after three years and 4.4% after five years.

But Stone, who appeared at a National Grocers Association conference last year, observed that grocers seem far more concerned about warehouse clubs than about mass merchants. "They still don't understand how much non-foods business they are losing to mass merchants."

With their buying clout and expertise in retail technology, mass merchants "may ultimately prove to be the most potent threat to traditional supermakets," says the Food Marketing Institute in a report on alternative store formats. FMI cites estimates from McKinsey & Co., Chicago-based consultants, that over the next decade the number of mass merchant stores selling grocery products--which includes Wal-Mart, Kmart, Target and Venture--could grow from 4,400 to 7,000. These stores, says McKinsey, offer prices on grocery-related products that are 15% lower than supermarkets' prices.

Last year, general merchandise stores accounted for $12.5 billion in grocery sales, up 3.2% over the $12.2 billion generated in 1990, according to Food Merchandising for Non-Food Retailers Supplement, Winter 1992.

While typical mass merchants carry snacks, soft drinks, paper goods, household cleaners and HBA (all of which accounts for about 15% of their sales, says FMI), many are in the process of expanding their grocery offerings. Kmart, for example, in refurbishing its 2,500 discount stores, will expand its food/candy departments from 80 linear feet,to between 100 and 200 linear feet, says Joe Dobson, buyer, packaged deli products, for Kmart, Troy, Mich.

He adds that products traditionally marketed on an in/out basis--such as coffee, tea and juice--will be carried all the time. In addition, Kmart will add more branded canned seafood and meat products from such suppliers as Hormel and StarKist.

Most ominously, Kmart and Wal-Mart have opened superstore formats that encompass a conventional supermarket as well as their traditional discount store lines. Kmart has opened a 147,000-square-foot Super Kmart Center, which contains a 40,000-square-foot supermarket, in Medina, Ohio (near Cleveland), and plans to open another this November in Montrose, Ohio (near Akron). "We're pleased with how the Medina store is doing," says Dave Marsico, director of combination stores for Kmart. "If things go well at these two stores, we'll open more."

Wal-Mart has made a much stronger commitment to the concept, opening 11 Supercenters since 1988 in Arkansas, Missouri, and Oklahoma, and plans to build another 15 to 20 this year. It may have as many as 300 Supercenters by 1997, says John Cook, McKinsey & Co. In addition, the retailing giant has announced that it will open a 704, 150-square-foot food distribution center in Clarksville, Ark., to supply its Supercenters, as well as its four Hypermart USA units and 20 supermarket and warehouse-style stores.

"The Supercenters are going to have a significant impact," says Roger Dierberg, executive vice president, Dierbergs Markets, Chesterfield, Mo., about 45 minutes away from a Wal-Mart Supercenter in Washington, Mo. "The Supercenter will take the place of the regular Wal-Mart store in small towns."

The supermarket industry has certainly not been oblivious to the threat posed by mass merchants and other alternative formats. FMI's committee on alternative store formats has made available ample material documenting the issue, including tips on how supermarkets can responds to these competitors (see sidebar).

In some cases, supermarkets have coped quite well with the presence of a mass merchant. Take the Festival Foods store in Onalaska, Wis, which saw average weekly sales jump $50,000 to $530,000, and stay there, following the opening of a Wal-Mart in its shopping center last year.

The reason for this windfall is that Wal-Marts typically attract traffic from a wide trading area, exposing nearby supermarkets to shoppers they don't ordinarily see. However, notes Stone of Iowa State University, as more Wal-Marts are established in a region, that spillover effect dries up as shoppers need travel a shorter distance to find the mass merchant. When that happens, neighboring stores start finding themselves losing business to the Wal-Mart.

In Onalaska, the Wal-Mart generates about 8% of its business through grocery products--snacks, beverages, detergents, coffee, and a private label line of cookies (Sam's Choice), according to the manager of the Wal-Mart. Pricing is EDLP, with hot prices on in/out specials.

But it is HBA that the Festival Foods store felt most vulnerable, notes Marlin Greenfield, general manager of Skogen's IGA, which operates the store. The company decided to enlarge the department, adding two island displays, and do a better job of displaying and promoting products. "We made the HBA section more open and visible," says Greenfield. He also added a pallet drop display to the front end and HBA items to the walls of values.

Importantly, Gateway Foods, La Crosse, Wis., which franchises the Festival Foods store to Skogen's and also supplies it, provided the store with "pallet quantity deals," says Greenfield. "They've been aggressive in trying to help us combat the increased competition." As a result, the store has maintained HBA sales at 2.5% of the sales mix. However, because the store has featured hotter prices, and more lower-gross, pallet-dropped items, HBA margins have suffered.

The Festival format is similar to that of Super Valu's Cub stores, which have also had many encounters with Wal-Mart in the Midwest. One such Cub, for example, coexists with a Wal-Mart 50 feet away. The store's wall of values features many of the Wal-Mart grocery items at attractive prices, "so there's no need to go to Wal-Mart," says a shopper. The Cub's manager asserts that the Wal-Mart "is no tougher on pricing than other supermarkets," adding, "Our chain has buying power, too, so we're able to hold on."

Some supermarket companies have put together a plan to combat alternative formats that applies to both clubs and mass merchants. Fleming Cos., Oklahoma City, for example, has introduced an oversize-product strategy, called the value-pack program. The products, consisting of 20% private label (the Rainbow label) and 80% national brands, are earmarked for pallet displays in end-aisles, the wall of values and regular shelf display, according to Dick Keeney, vice president, merchandising services. They are priced as much as 30% lower than comparable items carried by mass merchants and clubs.

"We look at this as a program to entice consumers to do all their shopping at our stores," Keeney says.

At press time, of the 40 to 100 items in the program, at least 10 to 15 had been accepted at each of Fleming's 30 divisions, says Keeney. The products include, for example, 35-ounce boxes of cereal, 120-count boxes of tall kitchen bags and 80-ounce bags of french fries. Bob Stauth, senior vice president of Fleming's Western division, says the program has met with mixed reactions. "Some retailers say 'it saved my life'; others say it took up space," he observes.

One of the big gripes that retailers have with Wal-Mart is that the discounter doesn't play fair, in some cases pricing smaller operators into oblivion. A few drug companies have seen fit to take the matter to court. In 1986, John Snider, owner of Hominy Rexall Drug, Hominy, Okla., sued Wal-Mart for violating the state's fair trade statute, and settled for an undisclosed amount. Wal-Mart, which unsuccessfully tried to change the law, raised its prices on certain products to comply with the law, says Snider.

This year, American Drugs and two other pharmacies in Conway, Ark., have filed suit against Wal-Mart, charging predatory pricing of some prescription products as well as some over-the-counter items. (Wal-Mart declined to address questions for this article.)

While some grocers seem content to accept the presence of Wal-Marts and Kmarts as a fact of life, few take such a complacent view of the new supercenters.

One wholesaler, which has been studying the potential impact of the Wal-Mart Supercenter, concludes that it would generate between $250,000 and $600,000 in weekly food sales. Half of those sales would be drawn from the community in which it is based, the rest from surrounding communities, diluting the impact on supermarkets in the base community by half. Still, a Supercenter doing $400,000 in weekly food sales would absorb about $30,000 in sales from each of seven supermarkets in its community.

How does a store cope with such a hit? "Stores should respond to a Wal-Mart Supercenter as they would to a Food Lion coming in," says an executive at the wholesaler. "They've got to get their volume up six months to a year ahead of the competitor's arrival by using sharper pricing, building a strong service and perishables image, and remodeling, if necessary." He also recommends doing consumer research in the store or by phone "to find out what the people want."

The Wal-Mart Supercenters that have opened up have taken "the cream off the top of independent retailers--between a minimal amount and $20,000 a week," says Jerry Vanden Brook, president, Sikeston, Mo. division, Malone & Hyde, a division of Fleming. "But nobody has thrown up their hands." According to Vanden Brook, the Supercenters offer a good perishables assortment in bakery, deli, produce and meat, and put a lot of emphasis on frozen foods. But they have a limited variety of dry grocery items compared to independents, he says.

Advises Vanden Brook, "If independents take care of the customer as they should, they should survive. We tell them, 'Keep a nice, clean, friendly store with fresh perishables. Give people a hometown flavor.'"

Hiring a greeter--someone to welcome shoppers as they enter the store, a Wal-Mart trademark--is a good idea if a store can afford it, adds Vanden Brook. In any event, "you should talk to every customer who comes in," he says.

In Batesville, Ark., the Harvest Foods store (part of the 54-store chain based in Little Rock) has experienced "some loss, though not what we anticipated," says Rick Summerhill, store manager. His store is 2.5 miles from a Wal-Mart Supercenter.

Decisions by Harvest's CEO Harry Janson to institute a sweeping private label program, add oversize and multipack products and reduce the prices of thousands of nationally branded products have helped Summerhill's cause in Batesville. (See "Harvesting a new image," page 60.) Janson has also been outspoken about insisting that the treatment supermarkets get from manufacturers be equal to that received by alternative trade formats. (See In The Trade, Progressive Grocer, May 1992.)

At the Wal-Mart Supercenter in Batesville pricing has been "inconsistent," says Summerhill, who attributes this to Wal-Mart's relative inexperience in the grocery industry. "They are learning as they go," he says. Meanwhile Harvest and other stores have met Wal-Mart's pricing initiatives head on. Kroger, he says, initiated a price war over milk and bread that lasted six months, bringing the price of milk down to 59 cents a gallon. Summerhill also claims that Kroger introduced triple coupons, to which he followed suit. (The Kroger store manager did not return a call.)

In Medina, Ohio, the Super Kmart Center has changed the complexion of supermarketing. Hawkins Supermarket, a six-store independent, for example, is down 30% at its Medina unit since the Kmart opened in July 1991, says Earl Hawkins, president.

Hawkins Supermarket has some advantages that have enabled the store to remain profitable, such as having no debt, owning its building and being at the center of town, notes Hawkins. Even so, he is adding more cases to the deli section, painting the store and possibly extending the store hours to complete with the 24-hour service offered by Kmart.

If the mass merchant supercenters are familiar to the supermarket industry, it's because in some areas grocers have been competing against similar formats for years. In western Michigan, for example, D&W Food Centers, a 22-store chain based in Grand Rapids, has had to find ways to compete with 200,000-square-foot Meijer stores.

One way is to allow refunds for products not purchased at its stores. "Who cares about a $3 item if we can keep a shopper in our store," says Jeff Gietzen, president and chief operating officer. Other D&W weapons: the convenience of smaller (35,000-square-foot) stores; a strong deli/foodservice department that offers prepared food; an in-store cafe; and carry-out service. "It may be easier for us because we grew up with Meijer," says Gietzen. "It's probably tougher for stores not used to them."
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Title Annotation:competing for market share
Author:Garry, Michael
Publication:Progressive Grocer
Date:Jun 1, 1992
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