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Format change in US grocery retailing.

Introduction - a changing retail environment

Retailing is the largest single industry in most countries throughout the world[1], with the grocery sector being the most important in terms of volume and value [2]. Grocery retailing in the US is a $400 billion industry and is currently undergoing a variety of changes. Sternquist and Kacker[3] argue that the emergence of new retail formats over the past two decades has significantly altered the character of retailing, with markets becoming increasingly diverse[4,5,6] and new patterns of competition [7].

Change in grocery retailing is evidenced by the popularity of warehouse clubs and super-centre formats. Brady and Davis [8] suggest that warehouse clubs encroach on traditional formats such as supermarkets. One study indicated that prices at warehouse clubs are, on average, 26 per cent lower than those of traditional supermarkets [9], suggesting that price plays a key role in explaining the popularity of the format. Sampson and Tigert [10] describe the warehouse club as a price leader format that represents one of the best examples of a low-cost, low-margin, low-ambience operation. Expenses and gross margins at warehouse clubs are, on average, half of those for conventional supermarkets [11] and customers generally give up convenience and service in return for lower prices [12]. Price is the driving factor behind warehouse clubs which represent a significant challenge for the supermarket format [10]. After several years of consolidation in the warehouse club arena, the top two warehouse club operators in the US market are now Wal-Mart and Price/Costco.

Other changes in the US market are evidenced by the entrance of discount retailers such as Wal-Mart, Kmart and Target into food retailing through "supercentre" formats which combine large supermarkets with full-line discount stores. In addition to groceries, supercentres include a wide variety of other product categories such as apparel, cosmetics, household goods, home furnishings, sporting goods and pharmaceuticals, and represent one of the fastest growing formats in the US market [13]. Indeed, a number of industry experts argue that supercentres pose a serious challenge to traditional supermarket retailing. Both Wal-Mart and Kmart have been quick to build supercentres. In 1990 Wal-Mart had only four supercentres and Kmart only two.

By 1995, Wal-Mart's four had ballooned to 230 and Kmart's two had expanded to 117 [13]. Projections are that supercentres will pull $12 billion in sales annually from traditional supermarkets. As general merchandise retailers increase the number of food products in their assortments, cross-elastic shopping patterns by consumers are predicted[14]. The emergence and growth of supercentres in the US market is notable from several perspectives. First, many of the new players in the supercentre phenomenon are companies which have expertise in general merchandise discount retailing rather than grocery retailing. These examples include, Kmart, Target and, to a somewhat lesser extent, Wal-Mart. Historically, food retailing in the US has been dominated by regional players (see Table I) rather than national companies, as is prevalent in general merchandise discount retailing. A discussion of these new leaders in the supercentre phenomenon such as Kmart, Wal-Mart and Target is therefore warranted.

The new players

In the 1960s Kmart emerged as a major player in general merchandise discount retailing. For Kmart, its discount stores evolved from its experiences with the variety store format. A wide but shallow product assortment was typical of variety stores. Kmart expanded on the variety store format by deepening assortments through its discount store format. When first introduced, discount stores such as Kmart were considered massive because they multiplied several times over the square footage normally associated with a typical variety store. Kmart remained the leader in US discount store retailing until supplanted by Wal-Mart. While both Kmart and Wal-Mart have many years of experience in general merchandise discount store retailing, their track record in terms of food retailing is more dubious. Both Kmart and Wal-Mart experimented (unsuccessfully) with the larger hypermarket format, combining food and general merchandise categories. The abandonment of the hypermarket format in the US market challenged the concept of "big is better". While the success of large store category killer formats like Toys R Us is highly touted in the US market, it should be pointed out that such formats expand assortment depth at the expense of product width.
Table I Top ten US supermarket chains

Chain             Headquarters

Kroger            Cincinnati, Ohio
Safeway           Pleasanton, California
American Stores   Salt Lake City, Utah
Albertsons        Boise, Idaho
Winn-Dixie        Jacksonville, Florida
A & P             Montvale, New Jersey
Publix            Lakeland, Florida
Ahold USA         Parsippany, New Jersey
Food Lion         Salisbury, North Carolina
Ralphs            Los Angeles, California

Source: Stores, July 1996




Wal-Mart is more experienced than Kmart in food retailing through its operation of warehouse clubs and provides a possible explanation for Wal-Mart's emergence into the supercentre format. However, warehouse clubs present certain uniquenesses (e.g. quantity, size and brand limitations) that may not be directly transferable to the operation of supercentres. In 1993, Kmart left the warehouse club business by selling its PACE warehouse club stores to Wal-Mart. One may hypothesize that Wal-Mart's experience with food retailing through the warehouse club format heightened its interest in supercentres. However, Wal-Mart's decision to target supercentres as a major expansion vehicle has been questioned. Some analysts are sceptical concerning Wal-Mart's involvement in supercentres and question the profitability of the grocery side of such stores. Wal-Mart, however, continues to say it is committed to the supercentre format. It plans to build approximately 100 supercentres a year and calls them its primary growth vehicle for the future [15].

Another important player in the super-centre phenomenon is the Target division of Minneapolis-based Dayton Hudson Corporation. Dayton Hudson operates three types of stores under separate divisions. Its traditional department store division includes such well-known retail names as Marshall Field's, Dayton's and Hudson's. Its promotional store division is operated under the "Mervyns" store name and the discount division is operated under the "Target" name. The Target division is reportedly Dayton Hudson's most successful division (in sales and profitability) having carved out a niche in discount retailing that is slightly upscale from either Wal-Mart or Kmart. It appears to be more successful in getting certain customer segments to cross-shop between typical discount store categories (e.g. health and beauty) and higher margin apparel product categories. Historically, many US customers would willingly purchase such items as health and beauty and lawn and garden items at discount stores but refuse to extend purchases into apparel and other soft goods categories. Target's success in apparel categories may, in part, be tied to its close association with department store retailing. The department store division and Target division are both based in Minneapolis. Perhaps Target hopes to encourage a similar sort of cross-shopping in its supercentres between general merchandise and food-related product categories.

Laaksonen[16] argues that many retail studies have focused primarily on one-stop approaches, with multistore approaches being less common. Furthermore, studies have emphasized fairly homogeneous consumer segments. Such approaches may be of limited value when attempting to understand the dynamic nature of retail patronage. A number of factors indicate a changing picture as regards such patronage. One in four US consumers now patronize warehouse clubs on a weekly basis for grocery items [17]. In addition, consumers are making fewer trips to traditional supermarkets each week and are spending less per trip[18-21]. In contrast, the percentage of consumers patronizing warehouse clubs, supercentres, and convenience stores for grocery items continues to grow [18-21], suggesting that consumers are increasingly patronizing a changing array of formats for their at-home food purchases. Retailers play a key role in the marketing process [22], acting as intermediaries between producers and consumers [23]. Change in one part of the retail system contributes to change in other parts of the system. The purpose of this study is to examine changing patterns of cross-shopping in relation to five different grocery formats. These include conventional supermarkets, supercentres, warehouse clubs, convenience stores and limited-line discount stores.

Research design

Interviews were conducted with 300 consumers to assess choice patterns across the five different retail formats. All households in a mid-sized US city located in the mid-west with working telephone numbers as listed in the telephone directory were included for sampling. Random numbers were drawn to determine which columns and lines were used per page of the directory. Telephone interviews were conducted with the individual who had primary responsibility for household grocery purchases. Three hundred individuals agreed to participate in the survey out of 447 contacted, yielding a response rate of 67 per cent. The mean age for the respondents was 38 years, average household income $32,405 and 59 per cent of the respondents were female.

To address the question of how consumers may be changing their patronage habits in light of an increasingly diverse retail market, a two-step approach was undertaken. First, a determination was made as to whether or not a respondent could be classified as a patron of a particular retail format. To determine this, each respondent was asked to indicate whether or not they had made food purchases on a regular basis from a retail type of store during the previous six months. Next, an assessment was made as to how the respondent's patronage had changed compared to five years ago. Patronage habits were assessed in relation to five different retail formats: conventional supermarkets, supercentres, warehouse clubs, convenience stores and limited-line discount stores. To give clarification to the meaning of each, questions were framed with reference to illustrations of the retail format (e.g. "warehouse clubs like Sam's Club, supercentres like Super Kmart, limited line discount stores like Aldi").

Once a determination was made of each respondent's patronage classification (patron/non-patron), respondents were then asked to indicate how their patronage behaviour had changed compared to five years ago. Open-ended questions and Likert scales were used to assess the degree of patronage change during the past five years. Thus, in addition to assessing consumer patronage across the different channels at one point in time, an assessment of change across time was also addressed. Laaksonen[16] argues for the importance of including a time dimension in retail studies to create a holistic picture of patronage dynamics in the context of changing retail environments.

Findings

Patronage by format type is presented in Table II. As indicated in the table, supermarkets had the largest number of patrons (97 per cent of the sample) followed by supercentres (60 per cent), warehouse clubs (30 per cent), convenience stores (18 per cent), and limited-line discount stores (16 per cent). The rather high penetration level for supercentres (60 per cent) is particularly notable given the relative newness of the format in the US market.
Table II Penetration ratios by retail channel (percentage of
respondents patronizing each channel)

Number Percentage

Supermarkets                   290    97
Supercentres                   18    160
Warehouse clubs                 89    30
Convenience stores              54    18
Limited-line discount stores    47    16




Changing patterns

Respondents were asked to indicate if they were shopping at each of the store types less, more, or about the same, compared to five years ago (Table III). Limited-line discount stores and traditional supermarkets had the largest percentage of their customer bases (12 per cent and 11 per cent respectively), indicating they were now shopping less at this type of store compared to five years ago. However, for all store types, a larger portion of the customer base said they were now shopping there more than those saying they were now shopping there less. Differences between "more" and "less" groups were particularly notable for certain distribution channels. For example, 82 per cent of the supercentre customer base and 62 per cent of the warehouse club customer base said they were now shopping more at those types of retail stores.

Customer loyalty, expressed as a percentage of total grocery purchases made, varied by distribution channel. The percentage of total grocery purchases made per channel was highest for supermarkets (73 per cent), followed by supercentres (35 per cent), warehouse clubs (15 per cent), convenience [TABULAR DATA FOR TABLE III OMITTED] stores (10 per cent), and limited-line discount stores (17 per cent). Customer selectivity (size of average purchase) also varied across channels. Warehouse club patrons made the largest purchases on average, followed by patrons of supermarkets, supercentres, limited-line discount stores and convenience stores.

Rust, Zahorik and Keiningham[24] argue that while customer retention has a major impact on a marketer's ability to remain competitive, market "churn" (number of customers and competitors entering or exiting the market) and competitors' retention rates also play a role in changing competitive patterns. Therefore, the extent to which customers of a particular channel also patronize other channels was assessed in the present study. A model for analysing channel choice is presented in Figure 1. As illustrated, patrons of a channel (e.g. supermarkets) may be distracted by other formats as these become available to them. Therefore a number of pertinent questions related to channel choice arise. First, what percentage of the supermarket customer base also patronizes supercentres? Is the portion of the customer base that supermarkets share with supercentres larger or smaller than the portion of its customer base shared with warehouse clubs? Furthermore, to what extent is a channel able to pull in or attract customers from each of the other channels? These questions are addressed in the following analysis of channel push and pull.

Channel push

In Figure 2, the extent to which a distribution channel pushes or shares its customers with each of the other channels is graphed. Supermarkets share the largest portion of their customer base (59 per cent) with supercentres. This suggests that supercentres have emerged as a direct competitor for supermarkets in a relatively short period of time. In contrast, warehouse clubs have had a somewhat longer presence in the US market. However, supermarkets only share 30 per cent of their customer base with warehouse clubs, 18 per cent of their customers with convenience stores and 16 per cent with limited-line discount stores. Thus, an important competitor for supermarkets emerges as being the supercentre.

Supercentres share a large portion (95 per cent) of customers with supermarkets. They compete directly against traditional supermarkets in their efforts to gain market share in an increasingly "over-stored" retail environment. About a third (34 per cent) of supercentre customers also patronize warehouse clubs, 17 per cent patronize convenience stores, and 20 per cent patronize limited-line discount stores.

Warehouse clubs also share a large portion (97 per cent) of customers with traditional supermarkets. Seventy per cent of warehouse club customers are shared with supercentres, indicating that warehouse clubs like traditional supermarkets may be feeling the impact of growing numbers of supercentres throughout the US. Less than 20 per cent of warehouse club customers are shared with convenience stores (18 per cent) or limited-line discount stores (19 per cent). Both convenience stores and limited-line discount stores share many customers with supermarkets (96 per cent and 100 per cent respectively). However, limited-line discount stores share a larger portion of their customer base (77 per cent) with supercentres than do convenience stores (57 per cent). Convenience stores and limited-line discounters both share approximately a third of their customers (30 per cent and 36 per cent respectively) with warehouse clubs.

Channel pull

As indicated in Figure 3, supermarkets are able to attract a large portion of customers from all of the other retail channels. This is not surprising, given the high penetration ratio (97 per cent) for supermarkets overall and their long-standing popularity with consumers. As supercentres continue to grow and expand, it is possible that penetration ratios for supermarkets will decline if consumers decide to replace traditional supermarket visits with visits to supercentres. Considering their newness, supercentres do surprisingly well in attracting customers from other distribution channels. Supercentres do particularly well with customers from limited-line discount stores, attracting 77 per cent of that customer base. Warehouse clubs pull consistently across all channels, attracting 30 per cent of the supermarket base, 34 per cent of the supercentre base, 30 per cent of the convenience store base and 36 per cent of the limited-line customer base. Overall, convenience stores and limited-line discounters have less pull power than supermarkets, supercentres, or warehouse clubs. Both consistently pull across the other distribution channels in the range of 16-20 per cent of the customer base.

Conclusions

It should be reiterated that the recent expansion of supercentres in the US market is coming strongly from national discount store retailers with limited experience in food retailing. Historically, food retailing in the US has been a higher turnover, lower margin business (see Table IV) dominated by regional players. The regional nature of the business is illustrated by the fact that the leading supermarket chain in the US (Kroger) has a presence in only 16 of 50 states. The second largest supermarket chain (Safeway) also has a presence in only 16 states. What then explains this recent emergence into food retailing via supercentres by national discount store operators? In all likelihood, Kmart, Wal-Mart and Target hope to take advantage of high frequency food purchasing patterns to influence cross-shopping into higher margin categories such as apparel. However, the willingness of the consumer to do such cross-shopping is still open to debate. While the results from this study indicate that supercentres have been reasonably successful in encouraging consumers to cross-shop between supercentres and supermarkets, will they be as successful in encouraging consumers to cross-shop between general merchandise and food categories within the supercentre? If such in-store cross-shopping does not occur, will these new entrants into the supercentre format be satisfied with operating stores that generate lower margins and the lower profit levels normally associated with grocery retailing in the US market? While many supercentre operators hope for "spill-over" effects from high frequency grocery purchases into non-grocery categories, some critics contend that supercentres are located too far from the shopper to allow for as frequent and convenient a shopping experience as desired[25]. Indeed, many supercentres in the US market are located in less than prime locations perhaps because of their large square footage requirements and the expense involved in building such stores.

Unlike the discount industry from which the new entrants into supercentre retailing have evolved, no supermarket chain in the US is currently national in scope. The top ten supermarket chains only control 30 per cent of the food market. In contrast, the top ten discount store retailers enjoy a collective market share approaching the 90 per cent level[25]. Thus, discount store retailing differs significantly from grocery retailing not only in terms of gross margin and inventory turnover levels but also in relation to concentration levels. Discount store retailing is more highly concentrated than grocery retailing and is dominated by national rather than regional players. One cannot help but question whether the emergence of these national discount retailers into food retailing will significantly contribute to a major reshaping of grocery retailing in the US market.

From a competitive standpoint, Humphries[13] suggests that US grocery retailers are probably more fearful of super-centre formats than they are of warehouse clubs. He describes warehouse clubs as a "bullet aimed at supermarkets" but supercentres are more like a rocket. Results from this study suggest that the analogy may be appropriate. Supermarkets share twice as many customers with supercentres as they do with warehouse clubs.
Table IV Comparisons between soft goods and the food industry

                       Apparel and general              Grocery
Factor                     merchandise                 and drug

Inventory turnover   4-5 times annually         16-20 times annually
Gross margin (%)     25-35                                     20-25
Shelf life           Measured in weeks/months       Measured in days
Product life cycle   Measured in weeks             Measured in years
Average sale ($)     20-50                                     15-40

Source: Kurt Salmon Associates




What does the future hold for these retailers in a market where population growth is just 1 per cent, the consumer base is ageing, household size is shrinking, and everyone seems to be building more stores and larger stores? In the words of the famous song - only the strong will survive.

References

1 "A survey of retailing", Economist 4 March 1995, pp. 54-82.

2 Burt, S. and Sparks, L., "Understanding retail grocery store format change in Great Britain: the Continental European dimension", Retailing: Theories and Practices, Vol. 7, 1994, pp. 139-42.

3 Sternquist, B. and Kacker, M., European Retailing's Vanishing Borders, Quorum Books, Westport, CT, 1994.

4 Valentino, C., "Grocery marketing: in a fragmented market", Advertising Age, 4 May 1987, pp. 58-12, 15.

5 Lewis, G., "Strategic management concepts in US food retailing and wholesaling", International Journal of Retail and Distribution Management, Vol. 19 No. 6, 1991, pp. 21-6.

6 Vastline, W.J., "The convenience store industry in the 1990s and beyond", International Journal of Retail and Distribution Management, Vol. 19 No. 6, 1991, pp. 27-31.

7 Segal, M.N. and Giacobble, R.W., "Market segmentation and competitive analysis for supermarket retailing", International Journal of Retail and Distribution Management, Vol. 22 No. 1, 1994, pp. 38-48.

8 Brady, J. and Davis, I., "Marketing's mid-life crisis", The McKinsey Quarter/y, Vol. 2, 1993, pp. 17-28.

9 Food Marketing Institute, Alternative Store Formats: Competing in the Nineties, Food Marketing Institute, Washington, DC, 1992.

10 Sampson, S.D. and Tigert, D.J., "The impact of warehouse membership clubs: the wheel of retailing turns one more time, "The International Review of Retail, Distribution and Consumer Research, Vol. 4, 1994, pp. 33-59.

11 Kelly, J.P., "Membership warehouse clubs: a unique form of wholesale and retail distribution", Proceedings of the 7th International Conference on Research in the Distributive Trades, Stirling, September 1993, p. 87-96.

12 Sampson, S.D. and Tigert, D.J., "Warehouse membership clubs: are they wholesalers or retailers and who is at risk?", Proceedings of the 7th International Conference on Research in the Distributive Trades, Stirling, September 1993, pp. 97-107.

13 Humphries, G., Prospects for Food Discounters and Warehouse Clubs, Pearson Professional Ltd, London, 1995, pp. 78-82.

14 Standard and Poor, "Retailing: supermarkets", Standard and Poor's Industry Surveys, 5 May 1994, pp. R87-91.

15 Lee, L. and Helliker, K., "Humbled Wal-Mart plans more stores", Wall Street Journal, 23 February 1996, pp. B1, B4.

16 Laaksonen, M. "Retail patronage dynamics", Journal of Business Research, Vol. 28 No. 1, 1993, pp. 3-174.

17 "Consumers hold back applause", Progressive Grocer, Vol. 73, 1994, pp. 47-53.

18 "Annual report of the grocery industry", Progressive Grocer, Vol. 70 No. 4, 1991.

19 "Annual report of the grocery industry", Progressive Grocer, Vol. 71 No. 4, 1992.

20 "Annual report of the grocery industry", Progressive Grocer, Vol. 72 No. 4, 1993.

21 "Annual report of the grocery industry", Progressive Grocer, Vol. 73 No. 4, 1994.

22 Kotler, P., Marketing Management: Analysis, Planning, Implementation and Control, Prentice-Hall, Englewood Cliffs, NJ, 1994.

23 Berman, B. and Evans, J.R., Retail Management: A Strategic Approach, Prentice-Hall, Englewood Cliffs, N J, 1995.

24 Rust, R.T., Zahorik, A.J. and Keiningham, T.L., "Return on quality (ROQ): making service quality financially accountable", Journal of Marketing, Vol. 59, 1995, pp. 58-70.

25 Johnson, J.L., "Supercentres: a marriage of convenience", Discount Merchandiser, March 1996, pp. 45-52.

Michelle A. Morganosky is Associate Professor of Consumer and Retailing Marketing at the University of Illinois, Urbana, USA.
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Date:Jun 1, 1997
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