November 22, 2006
Grocers Inch Closer to Wal-Mart
HSBC analyst Mark Husson said in a note to clients that supermarket chains such as Kroger, Safeway, Supervalu and Delhaize America have weathered the worst Wal-Mart dished out
and are now in much stronger competitive positions. Others, such as Albertsons and Winn-Dixie, he observed, were not as fortunate.
According to an Associated Press report citing Mr. Husson, supermarkets have been rocked in recent years by what he referred to as a “black death” brought about by Wal-Mart’s
push to food dominance in markets where it expanded its supercenter format.
Between 2001 and 2004, U.S. foods sales at the world’s largest retailer grew between 18 and 25 percent a year. For this year, Mr. Husson sees food sales growing about 15 percent.
A number of factors are behind Mr. Husson’s analysis that supermarket chains are in a better position to compete with Wal-Mart. For one, grocers have improved supply chain efficiencies
and negotiated favorable union contracts to make them more competitive on prices than they have been in the past. Supercenters once sold food at 20 percent below the price charged
by grocers. Today, that number stands between five and seven percent.
Mr. Husson also sees Wal-Mart slowing down some “partly because the age profile of the supercenter installed base is aging quickly and older stores have comp-store sales growth
that is slower than the more youthful ones.”
Discussions Questions: Do you agree with Mark Husson’s assessment that grocers, at least large chains such as Kroger, Safeway, Supervalu and Delhaize,
have narrowed the gap between themselves and Wal-Mart? Where have grocers made the biggest strides in going up against supercenters and what do they need to do to make further
advances?
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Supermarkets, as a whole, have adapted well to Wal-Mart, far better than their general merchandise cousins did. The weaker ones have mainly pruned themselves, and the stronger ones have gotten stronger.
It has always been the case that Wal-Mart does some things very well and other things poorly enough that its weaknesses can be exploited. And in the case of food, its weaknesses are in the areas that draw the most traffic: fresh food. A large number of consumers make their food shopping decision on the basis of one product: fresh meat. And Wal-Mart is far behind its competitors in quality and variety in this crucial department.
It has spent a lot of time over the past two years attempting to rectify that situation, but with its enormous velocity, key suppliers, such as natural and organic producers, can’t even think of doing business with Bentonville. Wal-Mart is now trying to regionalize its department, but that produces its own set of problems, mainly in distribution.
Food is very different from hard merchandise. We make our shopping decisions through a whole set of expectations, and price is not the overwhelming presence it is in, say, toys.
There will always be a Wal-Mart food customer, just as there will always be an Aldi customer. But the customers who don’t like what Wal-Mart offers are not going to be won over by adding a few upscale SKUs. They’re going to keep going to Costco or Trader Joe’s or Whole Foods or Dominick’s or Publix, because those merchants are offering something Wal-Mart can’t.
My vote for the best ones to learn from Wal-Mart and then to use it to beat Wal-Mart are HEB and Publix; both have learned how to leverage their positions in the marketplace combined with their local knowledge to hold their own against Wal-Mart. Safeway is learning fast with their push on fresh and lifestyle but it’s too early to know if this will work because Wal-Mart really has not penetrated Safeway’s core areas of San Francisco, Portland, Seattle and Washington DC.
Supermarkets seem to have become more focused on establishing themselves as destinations for their customers rather than cut-throat competitors to other supermarkets. The emergence of in-store health clinics, lifestyle educational programs — like in Hannaford and Giant Eagle — and high levels of meal solutions have all made customers look beyond price and create a real connection between customers and stores of choice. This has not only mitigated the impact of Wal-Mart, but has made some regional chains formidable competitors in their own right.
NGA and Supervalu have aided the independents, family chains, etc. in how to approach W-M, if not attack with different business methods.
Yes, H-E-B and even some Kroger divisions have figured out how to “level the playing field.” As for Publix, Wal-Mart is trying to figure out this premier supermarket chain!
With all due respect to W-M, it hasn’t been a stellar business in the last few years, unless you just want to play the sales and earnings strength. For some, okay.
It has boxed itself into the corner on a) trying to gain its new target audience, and b) expanding its core shopper into other high margin departments.
It has fumbled in some foreign countries. It hasn’t shown signs of redirecting its major destroyer ship, as in the past.
So why do the supermarket chains want to get closer to W-M? Is it on image, price, and/or W-M’s core shopper? Hmmmmmmmmmmmmmmm
The description of what Safeway is doing might be repositioning rather than competing. Their implementation of a multiple pronged strategy has improved their position against both Wal-Mart and the specialty grocery chains.
In Southern California, the Vons stores (Safeway) made a major investment with their recent remodeling effort. Along with an improved store layout, their assortments have become much broader and gone upscale – providing products that Wal-Mart doesn’t offer. This also better positions them to take market share from specialty grocers like Trader Joe’s, Whole Foods and Henry’s. They have also increased the footprint of their own branded merchandise. The end result is an opportunity to preserve margins and increase customer loyalty as one-stop destination.
How this is represented in the pending UFCW contract negotiations in Southern California, where there was a long strike in 2003, will be interesting.
The weak have been left behind but the strong grocery competitors have become stronger. This new grocer has mutated into a stronger, smarter, more resilient competitor. I don’t believe this will turn into War of the Worlds but you will see companies taking offensive positions and beating Wal-Mart at shelf.
Manufactures also realize that too much business in the hands of one retailer is not healthy. Manufactures need a healthy retail environment. The battle is on and consumers will be the winners.
Mark is correct in his assessments. The good mainstream supermarkets have figured out that they can compete on something other than price, while still remaining in the ballpark price-wise. Walk through a Kroger and Safeway of today, and try to remember it from 10 years ago. Today’s services, perimeter, and upscale choices vs. the decade-ago same-old same-old, with the focus almost entirely on price. They’ve morphed well, and they had to.
The surviving retail food has learned what Wal-Mart has known for a long time — that is, there is no one store for everyone. Now that supermarkets are segmenting their market and not trying to be all things to all people, they find they can compete.
I think that the surviving strong supermarket chains are in a good position. They are learning and adapting to the market to maximize their value to the customer and changing with respect to offerings, service and business practices to gain customers that will reward them for their efforts. They are becoming destinations and also doing well with thinking both inside and outside the box and I applaud them!
Wal-Mart is an incredible organization but some companies are proving that they are not “dead horses.” Kroger and HEB are both doing well, Kroger has some great approaches to their business. Wegmans is unbelievable, but may this not be possible for all to copy, they are truly outstanding. Also – TRULY OUTSTANDING and the MOST deserving of complete praise is Publix — The Nordstrom of the perishable industry!
I think that the ones who have it right will continue on their paths and adapt and tweak to become even better. I also think we will have some unfortunate fall out over the next few years, but there will always be Wal-Mart there to keep the best on their toes and to drive them to success in a very difficult and, overall, low margin business.
Conventional supermarkets are feeling less of a squeeze lately because:
a. Wal-Mart comp sales increases for food are very modest
b. Wal-Mart, Target, and Kmart haven’t built many new food locations
c. Club (warehouse) location growth is low
d. Club (warehouse) comp sales increases are low
In other words, when your competition stops new investment and aggressive market-share growth, your share of the pie stabilizes. If Wal-Mart develops a winning strategy that emphasizes great fresh and prepared foods and/or reasonably-priced organics, the conventional supermarkets will endure great pain.
You have to counter the competition by competing with various formats.
A&P has definitely held its own after Hurricane Katrina in Greater New Orleans. And in its Northeast/Mid-Atlantic markets, it has opened fresh formats, even right in front of the Wal-Mart, thanks to some real estate prowess, as well as the discount Food Basics format in other areas to counter-attack them.
The verdict has not been reached in Southern Michigan, however. The Farmer Jack format, much like Kroger there, has been hard hit by a very weak economy and the falling back of the market leader, Kmart. Of course, Wal-Mart is opening supercenters there.
A&P will try to reformat some of the Farmer Jacks, hopefully with a new banner; Jack’s Super Savings stores. If this is successful, perhaps they can regain lost market share. But it has to be executed carefully. EDLP with a flair for the gourmet and fresh is something not tried before in a larger format.
I would agree with the overall concept that the competitive landscape vs. Wal-Mart for supermarket retailers has gotten closer. As noted by other comments, this is due to supermarket retailers gaining efficiencies, consolidation in the supermarket channel and Wal-Mart’s saturation of Supercenter footprint in specific regions.
However, I would suggest that the competitive pressure from Wal-Mart on supermarkets is moving to new regions/demographics in the country. Many urban areas of the country will be seeing their first supercenters and this will spell the demise of weak retailers as has taken place in Cleveland and the closing of the Tops chain. This scenario could be played out in other areas of country with similar results.
Only the best regional and National supermarket operators will survive in the long-term.
The other concept that will put increased pressure on supermarket operators is the limited assortment stores. These appear to be gaining strength with the consumer and have excellent growth potential — not just with lower income shoppers but across a broad consumer base.
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Supermarkets, as a whole, have adapted well to Wal-Mart, far better than their general merchandise cousins did. The weaker ones have mainly pruned themselves, and the stronger ones have gotten stronger.
It has always been the case that Wal-Mart does some things very well and other things poorly enough that its weaknesses can be exploited. And in the case of food, its weaknesses are in the areas that draw the most traffic: fresh food. A large number of consumers make their food shopping decision on the basis of one product: fresh meat. And Wal-Mart is far behind its competitors in quality and variety in this crucial department.
It has spent a lot of time over the past two years attempting to rectify that situation, but with its enormous velocity, key suppliers, such as natural and organic producers, can’t even think of doing business with Bentonville. Wal-Mart is now trying to regionalize its department, but that produces its own set of problems, mainly in distribution.
Food is very different from hard merchandise. We make our shopping decisions through a whole set of expectations, and price is not the overwhelming presence it is in, say, toys.
There will always be a Wal-Mart food customer, just as there will always be an Aldi customer. But the customers who don’t like what Wal-Mart offers are not going to be won over by adding a few upscale SKUs. They’re going to keep going to Costco or Trader Joe’s or Whole Foods or Dominick’s or Publix, because those merchants are offering something Wal-Mart can’t.
My vote for the best ones to learn from Wal-Mart and then to use it to beat Wal-Mart are HEB and Publix; both have learned how to leverage their positions in the marketplace combined with their local knowledge to hold their own against Wal-Mart. Safeway is learning fast with their push on fresh and lifestyle but it’s too early to know if this will work because Wal-Mart really has not penetrated Safeway’s core areas of San Francisco, Portland, Seattle and Washington DC.
Supermarkets seem to have become more focused on establishing themselves as destinations for their customers rather than cut-throat competitors to other supermarkets. The emergence of in-store health clinics, lifestyle educational programs — like in Hannaford and Giant Eagle — and high levels of meal solutions have all made customers look beyond price and create a real connection between customers and stores of choice. This has not only mitigated the impact of Wal-Mart, but has made some regional chains formidable competitors in their own right.
NGA and Supervalu have aided the independents, family chains, etc. in how to approach W-M, if not attack with different business methods.
Yes, H-E-B and even some Kroger divisions have figured out how to “level the playing field.” As for Publix, Wal-Mart is trying to figure out this premier supermarket chain!
With all due respect to W-M, it hasn’t been a stellar business in the last few years, unless you just want to play the sales and earnings strength. For some, okay.
It has boxed itself into the corner on a) trying to gain its new target audience, and b) expanding its core shopper into other high margin departments.
It has fumbled in some foreign countries. It hasn’t shown signs of redirecting its major destroyer ship, as in the past.
So why do the supermarket chains want to get closer to W-M? Is it on image, price, and/or W-M’s core shopper? Hmmmmmmmmmmmmmmm
The description of what Safeway is doing might be repositioning rather than competing. Their implementation of a multiple pronged strategy has improved their position against both Wal-Mart and the specialty grocery chains.
In Southern California, the Vons stores (Safeway) made a major investment with their recent remodeling effort. Along with an improved store layout, their assortments have become much broader and gone upscale – providing products that Wal-Mart doesn’t offer. This also better positions them to take market share from specialty grocers like Trader Joe’s, Whole Foods and Henry’s. They have also increased the footprint of their own branded merchandise. The end result is an opportunity to preserve margins and increase customer loyalty as one-stop destination.
How this is represented in the pending UFCW contract negotiations in Southern California, where there was a long strike in 2003, will be interesting.
The weak have been left behind but the strong grocery competitors have become stronger. This new grocer has mutated into a stronger, smarter, more resilient competitor. I don’t believe this will turn into War of the Worlds but you will see companies taking offensive positions and beating Wal-Mart at shelf.
Manufactures also realize that too much business in the hands of one retailer is not healthy. Manufactures need a healthy retail environment. The battle is on and consumers will be the winners.
Mark is correct in his assessments. The good mainstream supermarkets have figured out that they can compete on something other than price, while still remaining in the ballpark price-wise. Walk through a Kroger and Safeway of today, and try to remember it from 10 years ago. Today’s services, perimeter, and upscale choices vs. the decade-ago same-old same-old, with the focus almost entirely on price. They’ve morphed well, and they had to.
The surviving retail food has learned what Wal-Mart has known for a long time — that is, there is no one store for everyone. Now that supermarkets are segmenting their market and not trying to be all things to all people, they find they can compete.
I think that the surviving strong supermarket chains are in a good position. They are learning and adapting to the market to maximize their value to the customer and changing with respect to offerings, service and business practices to gain customers that will reward them for their efforts. They are becoming destinations and also doing well with thinking both inside and outside the box and I applaud them!
Wal-Mart is an incredible organization but some companies are proving that they are not “dead horses.” Kroger and HEB are both doing well, Kroger has some great approaches to their business. Wegmans is unbelievable, but may this not be possible for all to copy, they are truly outstanding. Also – TRULY OUTSTANDING and the MOST deserving of complete praise is Publix — The Nordstrom of the perishable industry!
I think that the ones who have it right will continue on their paths and adapt and tweak to become even better. I also think we will have some unfortunate fall out over the next few years, but there will always be Wal-Mart there to keep the best on their toes and to drive them to success in a very difficult and, overall, low margin business.
Conventional supermarkets are feeling less of a squeeze lately because:
a. Wal-Mart comp sales increases for food are very modest
b. Wal-Mart, Target, and Kmart haven’t built many new food locations
c. Club (warehouse) location growth is low
d. Club (warehouse) comp sales increases are low
In other words, when your competition stops new investment and aggressive market-share growth, your share of the pie stabilizes. If Wal-Mart develops a winning strategy that emphasizes great fresh and prepared foods and/or reasonably-priced organics, the conventional supermarkets will endure great pain.
You have to counter the competition by competing with various formats.
A&P has definitely held its own after Hurricane Katrina in Greater New Orleans. And in its Northeast/Mid-Atlantic markets, it has opened fresh formats, even right in front of the Wal-Mart, thanks to some real estate prowess, as well as the discount Food Basics format in other areas to counter-attack them.
The verdict has not been reached in Southern Michigan, however. The Farmer Jack format, much like Kroger there, has been hard hit by a very weak economy and the falling back of the market leader, Kmart. Of course, Wal-Mart is opening supercenters there.
A&P will try to reformat some of the Farmer Jacks, hopefully with a new banner; Jack’s Super Savings stores. If this is successful, perhaps they can regain lost market share. But it has to be executed carefully. EDLP with a flair for the gourmet and fresh is something not tried before in a larger format.
I would agree with the overall concept that the competitive landscape vs. Wal-Mart for supermarket retailers has gotten closer. As noted by other comments, this is due to supermarket retailers gaining efficiencies, consolidation in the supermarket channel and Wal-Mart’s saturation of Supercenter footprint in specific regions.
However, I would suggest that the competitive pressure from Wal-Mart on supermarkets is moving to new regions/demographics in the country. Many urban areas of the country will be seeing their first supercenters and this will spell the demise of weak retailers as has taken place in Cleveland and the closing of the Tops chain. This scenario could be played out in other areas of country with similar results.
Only the best regional and National supermarket operators will survive in the long-term.
The other concept that will put increased pressure on supermarket operators is the limited assortment stores. These appear to be gaining strength with the consumer and have excellent growth potential — not just with lower income shoppers but across a broad consumer base.