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    COVER STORY: Know your enemy

    Some are painfully obvious, others will blindside you. But nontraditional competition means much more than Wal-Mart, and each grocer must decide which suspects most bear watching.

    By Jenny McTaggart

    A store manager from a reputable regional supermarket chain was discussing competition recently. While he predictably acknowledged that his new store would go head-to-head with two of the leading national grocery chains that had stores in the area, he dismissed the idea that Target and Wal-Mart should be on his radar.

    "They're not really our competition," he insisted. "We're about fresh foods."

    What this retailer wasn't facing is that the bulk of U.S. consumers are now shopping more than one channel regularly for food, fresh or otherwise, as well as for the nonfood items that were once an easy score for supermarkets. Even assuming consumers are still buying all their fresh food from a supermarket, you can bet they're at least occasionally going elsewhere for other grocery items.

    A new report from global trade credit insurer Euler Hermes ACI suggests that alternative formats are going to take an even bigger bite out of the grocery industry in the coming years. "The outlook for traditional grocers is bleak," says the firm's risk v.p., Francois Bergeron. "The alternative formats will keep flexing their muscles in the industry, putting a tighter squeeze on the regional and national grocery chains."

    This phenomenon won't be slowing down any time soon, if ever, industry observers agree. Rather, channel blurring is expected to increase significantly in coming months and years as shoppers continue to be driven by value, convenience, and other factors that characterize life and shopping behavior in the 21st century.

    The key for grocers is not to panic, but to get smarter by learning more about the specific trade channels that are likely to rock their world and choosing their battles accordingly.

    Broadly speaking, the up-and-coming contenders poised to intensify their attacks on the grocers' turf include:

    -Drug chains,

    -Convenience stores,

    -Dollar stores,

    -Foodservice operators of

    many stripes, and

    -Wholesale club chains.

    The level of threat posed by each of these channels and others depends on the circumstances of each market. But keen observers and analysts of this ever-more complex retail landscape tell Progressive Grocer that the impact of nontraditional competition as a whole will continue to grow and force change in the retailing landscape. For evidence, consider Winn-Dixie's bankruptcy and ongoing reorganization, or the trade's looming acquisitions.

    "The good news for supermarket operators is that there isn't another Wal-Mart on the horizon," observes Tim McGuire, director and head of the global grocery practice at McKinsey & Co. "The bad news is there's still an awful lot of growth to come from Wal-Mart, and there's a stream of other retailers behind it that collectively may add up to as much as Wal-Mart."

    In other words, "There's no rest for the weary in the supermarket industry today," notes McGuire. "It's a constant battle to evolve and upgrade business through a variety of different strategies to remain competitive and, in many cases, to regain competitiveness."

    Indeed, many supermarkets have been knocked off their feet in markets that include Wal-Mart and other nontraditional competitors, including drug stores, limited-assortment stores, dollar formats, and warehouse clubs. Ironically, some supermarkets are finding that other traditional grocers are the toughest to beat, especially those operators that have already significantly ramped up their operations to compete with Wal-Mart.

    McGuire, like other observers, predicts that the industry is about to see a "flood" of acquisitions akin to what took place in the late 1990s. "The market demands growth, and you can't deliver that through same-store sales growth. That leaves two levers: new stores or acquisitions," he notes, "[and] the U.S. market is the most overstored in the world."

    The trend is already at play: While Whole Foods and other alternative competitors of the moment are snatching up available real estate, major traditional players that vary in scope from Albertsons to Marsh are investigating the M&A options, and others are exiting the toughest markets.

    Despite the challenging climate, however, supermarkets that execute a winning strategy can prevail, the experts contend. Among the game plans retailers should consider, according to McGuire and others, are:

    -Optimizing product assortment,

    -Micromerchandising,

    -Personalized marketing, and

    -Capitalizing on health-and-wellness concerns, while preparing for changing demographic trends.

    Also, don't forget value. Consumers' fondness for low prices is here to stay, analysts agree, so retailers will have to find additional ways to cut costs so that they can pass along deals to their shoppers.

    As much as supermarkets have made an effort to "differentiate" in the past few years, however, many of them are still focusing on the same things, contends McGuire. "I challenge people to figure out the difference in strategy as stated by most traditional supermarket operators. You can look at any annual report or analyst call and see virtually the same message. They're going to focus on fresh, do a better job in the perimeter areas of the store, and have a better offering in meat and seafood."

    While these are certainly laudable goals to strive for in the supermarket industry, they may not take the industry to the next level in meeting tomorrow's consumer needs.

    Reality check

    As was reported by ACNielsen last year, the number of trips people make to the supermarket is declining. A midyear channel-blurring report by ACNielsen estimated that the average number of trips to the grocery store was 68, down five trips from the same period in 2001. It's not that consumers are shopping less for groceries, however; it's that they're going to other stores. Average midyear trips to supercenters were 27, up seven points compared with 2001. Trips were also up at club and dollar stores.

    "Value retailing is winning today," notes Todd Hale, v.p. at ACNielsen. With the price of both fuel and gasoline on the rise, and the continuous split of Americans into "haves" and "have-nots," the trend is likely to continue, he adds. Among the leading value, or discount, retailers that are eating away at supermarket sales: Wal-Mart and other supercenters; limited-assortment formats such as Aldi and Save-A-Lot, which collectively have close to 2,500 stores; dollar stores; and warehouse clubs, primarily Costco.

    These alternative competitors are fulfilling a number of shopping occasions that used to belong to supermarkets. Convenience stores and dollar stores are gaining trips made to fulfill immediate needs and for fill-in items. Meanwhile an increasing number of routine and stock-up trips are going to warehouse clubs and supercenters. That leaves supermarkets bypassed on more and more occasions.

    "Grocery stores are getting squeezed at both ends," says Hale. "They're like a sitting duck [because] there are so many of them."

    Wal-Mart is the retailer most often showing up on grocers' radar screens and in their nightmares, and it will no doubt continue to be as it expands its presence. The Bentonville behemoth recently confirmed its plans to open as many as 370 units in the United States this year.

    Right behind Wal-Mart are limited-assortment stores such as Aldi and Save-A-lot. "These are very small formats with relatively low sales per store," says McGuire, "but they're a real economic force and are continuing to grow."

    Dollar stores, another value format that's taken away food and nonfood sales from supermarkets, will be doing even more with food, cautions McGuire. "Dollar stores are getting 50 percent to 60 percent of their sales from the same type of items supermarkets sell. They're now adding refrigerated and frozen sections to every store. Dollar General and Family Dollar combined have 14,000 stores, with another 10,000 to come."

    Dollar General Market, a format that's dangerously close to a supermarket, with 50 percent grocery, including meat, deli, dairy, baked goods, and frozen foods, will be expanding this year, adding at least 30 new stores in different parts of the country.

    And if you think drug stores are done with food retailing, think again. "Drug stores are really in a situation where they have to drive their front end sales," notes industry watcher Bill Bishop, president of Willard Bishop Consulting in Barrington, Ill. "So far their food offering has been more of a convenience offering. You can feel them beginning to change, however, and you can see more manufacturers working with them on that. I think they'll increasingly be competition for smaller shopping trips, smaller households, or fill-in trips."

    Another format turning to food to drive sales is convenience stores. "Convenience stores will ramp up their food selections beyond deli, and will use the pump to offer specials or permit people getting gas to order things inside and have it charged to the pump charge," says John Stanton, professor of food marketing at St. Joseph's University in Philadelphia.

    ACNielsen's Hale agrees with Stanton. "Convenience stores are going to evolve to be much different than what they are today. They can't continue to focus on beer and cigarettes to drive sales. They'll become more focused on foodservice," says Hale.

    C-store innovators Wawa and Sheetz, both based in Pennsylvania, are leading the pack with better convenient foodservice offerings and restaurant-like atmospheres. Circle K is another c-store player to watch, according to McGuire, who notes that Canadian powerhouse Couche-Tard's acquisition of the U.S. chain is bringing about "tremendous sales increases through an aggressive model of remodeling stores, based on the Canadian formula."

    Issaquah, Wash.-based warehouse club operator Costco Wholesale Corp. is being watched more closely in the industry as well. "Costco is clearly winning," says McGuire. "They just turned in another month of 6 percent same-store sales growth. Soon they'll be selling more groceries than anyone in the U.S., with the possible exception of Kroger and Wal-Mart." The company, which has about 346 units in the United States, plans to add 18 to 20 new stores by September.

    At the opposite end of the value-retailing spectrum is specialty food retailing a la Whole Foods, Fresh Market, and other retailers that focus on gourmet selections. Shoppers are clearly willing to pay for the difference. "Whole Foods is a phenomenon," notes McGuire. "Expect them to continue to grow very aggressively."

    If you can't beat 'em...

    In such an overstored, perhaps overserved playing field, supermarkets may feel limited in their opportunities to fight back.

    Some grocers are playing the channel-blurring game themselves to reclaim grocery shoppers' dollars. Supervalu, Publix, and Bashas' will be debuting organic formats this year to see if they can win health-and-wellness-minded shoppers. Food Lion is rolling out its Bottom Dollar concept to give price-savvy, convenience-minded shoppers a pure supermarket version of the limited-assortment format. Giant Eagle and others are taking on c-store retailers via the grocers' own versions of gasoline retailing and rewards programs. And a growing number of supermarkets are putting pharmacy operations at the top of their lists to capitalize on a health-minded society.

    But what can and should retailers do to also preserve the concept of a traditional supermarket? Most observers agree they can grow their business with an evolved version of the format, provided they focus on cost efficiencies and simultaneously stay one step ahead of consumer trends.

    "It's a two-pronged effort," notes McGuire. "[Supermarkets] can't give up on the race for lower costs. But they also have to consider what matters most to their customers, how to truly differentiate their stores."

    To keep costs down, retailers should look beyond staff reductions, offers McGuire. "I would argue that most grocers need to run harder and faster, and apply some new tools to really make things work. We have to be talking about taking percentage points of two, three, four, and five out of the cost structure as a percent of sales."

    For starters, most supermarkets could afford to substantially reduce their SKU counts, many observers say. "The average North American supermarket stocks 25,000 items. Studies have shown that the average family buys 250 of those each year," says McGuire, "which means there must be a few thousand items that most retailers could eliminate without really disappointing their customers."

    Cincinnati-based Kroger is one retailer that's taking steps in the right direction, notes ACNielsen's Hale. The company's "Right Store, Right Price" initiative is focused on having a wide offering of product categories, with a selective reduction in assortments within categories.

    A more big-picture concept is lean retailing, an approach borrowed from the idea of lean manufacturing that's reaping impressive results for the handful of leading retailers applying the practice, says McGuire.

    Sobeys, which is the No. 2 grocer in Canada, has seen a real impact from implementing a lean-retailing approach. In fiscal 2005, Sobeys invested significant effort and resources in its SMART Retailing Initiative, which focuses on continuous improvement in its stores' operational processes by promoting efficiency and reducing waste. The back-to-basics approach includes reducing shrink and improving inventory management, as well as improving productivity via technology that includes a common point-of-sale system and a voice pick system in its warehouses. To reduce shrink, for instance, Sobeys implemented a just-in-time (JIT) production system in its delis.

    As a result Sobeys and the other retailers that are focusing on better efficiencies are able to pass along the savings to their shoppers. "They're seeing a great cycle of driving meaningful efficiency while providing great service," says McGuire. "To eliminate waste, reduce prices, and increase volume -- that's a wonderful cycle in the grocery industry. They can also use the savings to fund renovations and improvements to their stores."

    This "lean" process should be applied throughout the entire company, including the supply chain, head office, and warehouse, he continues. "Everything that's done adds value. It frees up costs and lets companies reinvest in activities that really matter to the customer, including expanded assortment, improved product quality, and improved service."

    One on one

    As companies consider how to reinvest, micromerchandising and personalized marketing should be top priorities, the experts suggest. "The key for retailers is to tailor their stores to the markets they're in," suggests Nick McCoy, senior consultant at Columbus, Ohio-based Retail Forward. "Stores are going to get smaller and more focused," he predicts.

    "We're already seeing a focus on strengthening offerings and creating value for shoppers at individual-store level," observes Bill Bishop.

    Private label is another way for retailers to differentiate -- but their brands must truly be different, says McGuire. "Too many American supermarkets are still operating on the belief that private label product means low-price generic vs. product innovation. In other markets private label is used to differentiate one store from another," he notes.

    Retailers should also be thinking about how to increase the personalized connection they have with shoppers, says Bishop. "Service is part of that, but loyalty data should also be used to create personalized offerings." A great example, he notes, is Richmond, Va.-based Ukrop's partnership with Grocery Shopping Network, which recently reported that households getting personalized offers are spending 10 percent to 12 percent more than those that aren't.

    In addition to providing a more personal touch, supermarkets can't underestimate the importance of convenience, observers stress. Whereas Whole Foods features line managers who point customers to the next available line, few traditional grocers have mastered how to get shoppers in and out of the store quickly and without hassle.

    Technology has a role to play, says Bishop. "Supermarkets really need to accelerate their efforts to use technology to increase the speed of checkout."

    Change is healthy

    Demographic trends should be a driving force as supermarkets consider how to differentiate themselves -- and one trend that virtually all demographic groups seem to be mindful of is health and wellness.

    "Supermarkets have a real opportunity to position themselves as a place where families can find healthier options," says Bishop. The latest FMI Shopping for Health study, which Bishop Consulting helped write, finds that while everyone aspires to be thin and healthy, they're basically trying to live and consume in a healthier fashion, he notes. "A minority is on diets, but the vast majority has weight-management strategies. With that in-between state, the position to serve is really big for supermarkets."

    As many supermarkets have discovered, the concept of health and wellness goes hand-in-hand with natural and organic foods, adds Retail Forward's McCoy. "People want to eat healthier, and I think that will continue. Supermarkets need to make it easier to find nutritious foods, and for shoppers to compare foods from a nutritious standpoint."

    Specific demographic groups that supermarkets should be considering include the aging baby boomer population and tech-savvy Generation Y. Already the HBC business is being revolutionized by vanity-type products such as cosmetics and hair treatments that appeal to a more mature crowd, says Bishop. Meanwhile a few food retailers are coming up with merchandising ideas to serve their older clientele. Virginia Beach, Va.-based Farm Fresh, for one, is making some of its stores more mature-shopper-friendly by incorporating sitting areas and magnifying glasses for label reading.

    Just as baby boomers have special needs, so do new families, college students, and others in the 20- to 30-something range, some of whom rarely, if ever, step foot in a supermarket.

    "I heard a professional skateboarder being asked during an interview what he would buy if he were in the supermarket. He asked why he'd go there in the first place," notes McCoy. "Consumers' attitudes are changing, and food retailers have to be in tune with that."

    By Jenny McTaggart
    • About Jenny McTaggart

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