RETAIL INDUSTRY Grocers seek foothold as Wal-Mart extends its reach into food

Service, not price, will keep grocers competitive with the chain, analysts say.
LOS ANGELES TIMES
Wal-Mart's move into the grocery business has been likened to a plague that afflicts rivals across the United States. Not everyone dies, but most suffer.
The success of its giant Supercenters has made Wal-Mart Stores Inc. the largest U.S. food retailer.
It is nearly impossible to beat the Bentonville, Ark.-based retailer on price, industry experts say, because it does almost everything -- from paying employees to managing inventory -- more cheaply than its competitors.
And that low-cost structure is a key reason that 70,000 supermarket clerks are on picket lines in central and Southern California.
Citing the threat from Wal-Mart and other nonunion retailers, the Vons, Ralphs and Albertsons grocery chains are pushing for cutbacks in health coverage and wage freezes in their new contract with the United Food and Commercial Workers union.
That stance triggered a strike by Vons workers that started Oct. 11, with Ralphs and Albertsons locking out their employees the next day in a show of corporate solidarity.
Finding a focus
But as important as cost-cutting is, industry analysts say supermarkets can't survive by trying to match Wal-Mart on price. Rather, staying in business will hinge on their being what Wal-Mart is not.
"They can talk about lowering wages and lowering prices, but that doesn't do anything to help them better compete with Wal-Mart," said Sandra Skrovan, author of a report on Wal-Mart's food business for Columbus-based consulting company Retail Forward. "They need to compete with Wal-Mart on something other than price."
Fresher produce, better service, a wider variety of brands and more convenient locations will be key to these chains' survival, industry observers say. Lowering costs is part of the equation but not the entire solution, they say.
"Not everyone perceives value the same way," said Karen Brown, senior vice president of the Food Marketing Institute, a group representing grocery retailers. "For some, value means higher levels of service."
For example, she said, stores can stock special items that can't be found in discount stores, such as natural and organic foods, ingredients for low-carbohydrate diets, and grab-and-go prepared meals.
"Supermarkets are just trying to determine what their niche is going to be," Brown said. "They are asking, 'How can I be different than my competitors?'"
Being local
Traditional supermarkets are typically much closer to people's homes than the Supercenters -- which serve a wider geographic area -- and offer more brands.
Some supermarkets carry up to 500 different types of produce, about double what Wal-Mart stocks, Merrill Lynch analyst Mark Husson said.
Supermarkets also can offer more popular regional brands and gourmet products in addition to the name-brand goods carried by Wal-Mart.
Even as supermarkets strive to reduce labor costs, most think they will still be able to offer more service than Wal-Mart, keeping clerks on hand to answer questions about produce and providing staff in the meat and seafood department to cut and package items. Service, analysts say, has never been Wal-Mart's strong suit. Its draw is price.
Wal-Mart's advantages
In surveys last year at stores in Las Vegas, Dallas and Tampa, Fla., financial analysts at investment bank UBS Warburg found that a shopping cart of groceries was 17 percent to 39 percent cheaper at a Wal-Mart Supercenter than at a traditional supermarket with a union work force.
The retailing giant can offer these lower prices in part because it pays workers about 30 percent less than its unionized rivals, Skrovan said.
Supermarkets pay an average hourly wage of about $10.35, Retail Forward reported, compared with about $8 an hour on average at Wal-Mart.
But the chain also possesses a sophisticated distribution and replenishment system and huge economies of scale, given its 3,412 stores around the globe.
Retail Forward estimates that about $82 billion of Wal-Mart's $245 billion in sales last year came from food and drugs, enough to make it the nation's largest food retailer.
Wal-Mart got its start in 1962 selling discount merchandise in rural Arkansas. It grew rapidly in the decades that followed, expanding into the grocery business in 1988.
In the next few years, analysts expect the company to nearly double its number of U.S. Supercenters to 2,250 -- in many cases converting current stores to the larger Supercenter format.
By 2007, Wal-Mart's food sales are expected to reach $167 billion, giving it control of 35 percent of U.S. grocery sales.
Neighborhood approach
But over time, Wal-Mart intends to open more of what it calls Neighborhood Markets.
These stores, which are about the same size as traditional grocery stores, allow Wal-Mart to reach customers in more densely populated urban areas and attract customers who are less likely to patronize the company's giant stores.
Less utilitarian than their warehouse counterparts, the Neighborhood Markets feature the kinds of pleasant, homey touches that many supermarket chains have, including a coffee and pastry station.
Yet, they too have the Wal-Mart advantage of lower prices. These stores were a chief part of Wal-Mart's strategy in Dallas, where in only five years it went from the sixth-largest food seller to the top position.
From 1997 to 2002, the chain grew from eight Supercenters and nine Sam's Club stores to 28 Supercenters, 13 Sam's Clubs and 10 Neighborhood Markets, according to Retail Forward.
That growth came at the expense of supermarket rivals. Winn-Dixie Stores Inc. closed all 15 of its Dallas stores. Minyard Food Stores Inc. closed nine locations, and Brookshire Grocery Co. shuttered five outlets.
"Fifteen of the top 100 supermarket chains have filed for bankruptcy or liquidated since Wal-Mart started opening these Supercenters," retail consultant Burt P. Flickinger III said.
And over the next five years, analysts expect Supercenters to close down about 400 grocery stores a year, a rate of about two stores for each megastore opened.