Supermarket Smackdown

SAM KITTNER FOR TIME
Top This: Wegmans and other chains know that Wal-Mart is vulnerable in prepared foods and perishables

Cocky. Ruthless. Vicious. Mean. Those are some of the ways Jerry Davis, CEO of Affiliated Foods Southwest, describes the supermarket juggernaut that is Wal-Mart. He could have added hyperefficient, low cost and customer focused. The megachain's rapidly expanding grocery business which now accounts for a fifth of U.S. food sales has left a trail of shuttered supermarkets in its wake. This year in particular, the damage is piling up. Winn-Dixie, once a Southern power, suspended its dividend indefinitely, causing its stock to drop 28% in January, and is expected to close more than a hundred stores. This comes on the heels of Fleming Cos.' liquidation last summer of what had been the second biggest grocery wholesaling business in the country. But even excluding that particular flameout, the industry has lost more than 50% of its market value in the past five years. "The people at Wal-Mart don't want some of the business," Davis seethes in Little Rock, Ark., where his wholesaling cooperative supplies 50 supermarkets and some 600 convenience stores in and around Arkansas. "They want all of it."

Blaming Wal-Mart is a common industry response, but it's also misguided. The grocers have contributed enormously to their own problems. Their inefficient supply chain, for instance, provided Wal-Mart with a golden opportunity. And their initial response to the new threat was fairly myopic. Like too many of his fellow grocers, Davis thought getting bigger himself would make things better. Before Wal-Mart, he says, "we tried to limit our distance from our warehouses to 300 miles. Now we're going 500 miles" to reach stores as far as the Gulf Coast. Kroger, Albertson's and Safeway each went on an acquisition spree a few years ago, but whatever savings that resulted from centralizing operations have been offset by the obliteration of local ties and customer service. And Albertson's isn't finished. The company (2003 sales: $35.4 billion) just bought New England's Shaw's from old England's J Sainsbury for nearly $2.5 billion. Apparently, the British have had it with the colonies' low ROI.

"There really is a crisis in the industry," says Gary Giblen, head analyst at boutique Manhattan research firm CL King & Associates. The sky started falling along with same-store sales in 2001, as alienated shoppers began steering their grocery carts not only toward Wal-Mart's food-laden Supercenters but also toward warehouse clubs, discount chains, drugstores, dollar stores and, on the high end, trendy salutes to organic produce. "Conventional supermarkets really have no reason to exist anymore," says Giblen. "They're basically becoming convenience stores."

The big national chains are undergoing a massive restructuring that will determine which among them survive. "We've made a few mistakes," concedes Safeway CEO Steve Burd, who was the industry darling for years until his cost-cutting skills sucked the life out of recent acquisitions, including Dominick's in Chicago and Genuardi's in Philadelphia. Revenues at the 1,800-store chain edged up 2%, to $35.6 billion last year, as the company logged $170 million in losses. With several big pension funds calling for his head, Burd embarked on a two-week road show last month to convince investors that his performance (Safeway's share price has dropped nearly 60% from 1999) is at least on par with his peers'. He also maintains that his tough stance on labor negotiations which resulted in a strike in Southern California that cost the region's big three chains some $350 million in earnings last quarter won enough concessions to stay competitive, even after Wal-Mart unleashes its Supercenters in the area. The next step, experts agree, is to continue narrowing the price gap with the world's largest retailer and find a way to justify the remaining premium. Here's what supermarkets need to do to avoid the ultimate checkout:

Differentiate Or Die
After Wal-Mart launched its Supercenter format in 1991, it took the company three years to reach $1 billion in annual U.S. grocery sales. But a mere decade later, it is topping $100 billion a year, which is almost as much as the sales of the next three biggest chains combined. "To a certain extent, Wal-Mart's strength is more of a reflection of the lack of difference among stores," says Willard Bishop, a supermarket consultant in Barrington, Ill. Conventional grocers are starting to get the message differentiate or die which is why some are jazzing up the old big-box routine. The northeastern Wegmans chain just opened its first store in Virginia, where it is spicing up its prepared-foods sections with daily cooking demonstrations. In Indiana, Marsh opened two stores this winter that have circular layouts. Each store has a central cafe with European-style markets on the perimeter showcasing, for example, artisanal cheeses in one room and baby food and supplies in another. And sticking with the old retail-is-detail adage, Marsh pipes mellow guitar instrumentals not only into the stores but also into the parking lots and faux-stone bathrooms.