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WAL-MART, AFTER REMAKING
DISCOUNT RETAILING, NOW
NATION'S LARGEST GROCERY CHAIN
Grocery Chains Fighting Wal-Mart For Market Share
PATRICIA CALLAHAN AND ANN ZIMMERMAN,
Posted 5/31/2003
THE WALL STREET JOURNAL:
When two Wal-Mart Supercenters and a rival regional grocery opened
near a Kroger Co. supermarket in Houston last year, the Kroger's
sales dropped ten percent. Store manager Ben Bustos moved quickly
to slash some prices and cut labor costs, for example, by buying
ready-made cakes instead of baking them in-house, and ordering precut
salad-bar items from suppliers. His employees used to stack displays
by hand: Now, fruit and vegetables arrive stacked and gleaming for
display.
Such moves have helped Mr. Bustos cut worker-hours by 30% to 40%
from when the store opened four years ago, and lower the prices
of staples such as cereal, bread, milk, eggs and disposable diapers.
Earlier this year, sales at the Kroger finally edged up over the
year before.
Just as Wal-Mart Stores Inc. reinvented the world of discount retailing
over the past two decades, it is now remaking the grocery business.
The Bentonville, Arkansas behemoth started selling food in 1988
and became the nation's largest grocer last year, with more than
$53 billion in grocery sales. Wal-Mart sells groceries in at least
1,258 supercenters, 180,000-square-foot grocery/discount-store combinations,
and in 49 small Neighborhood Markets. Most of the stores are in
the South and Southwest.
If Wal-Mart's supercenters continue to expand at their current
pace, within this decade, more than three-quarters of the nation's
Krogers and Albertsons Inc. stores and more than half the Safeway
Inc. outlets could be within ten miles of a Wal-Mart supercenter,
according to Trade Dimensions, a market-data provider.
The fight for the carts and minds of customers already is having
an impact. Shoppers in competitive markets are seeing prices fall
as Wal-Mart pushes rivals to match its low costs. Among the tactics
the chains are using: improving their inventory-tracking systems,
doubling or tripling discount coupons and boosting customer loyalty
with discount-card plans.
"Wal-Mart made us look at ourselves and reinvent ourselves," says
Dick Tillman, who heads Kroger's Delta division of five Southern
states, where Wal-Mart has built 80 supercenters and four Neighborhood
Markets of roughly 40,000 square feet, about the size of an average
supermarket.
The rivalry between Wal-Mart and No. 2 Kroger, based in Cincinnati,
No. 3 Albertsons, of Boise, Idaho, and No. 4 Safeway, of Pleasanton,
California, eventually could mean the death of at least one of the
chains. Even with little direct Wal-Mart competition, Albertsons
has been shrinking, closing underperforming stores, and Safeway
is struggling to digest a plateful of acquisitions of regional chains.
In smaller markets, independent stores and regional chains already
are feeling pressure. In the past decade, 29 chains have sought
bankruptcy-court protection, with Wal-Mart as a catalyst in 25 of
those cases, says Burt Flickinger III, managing partner of Strategic
Resource Group, a supermarket consulting firm.
Consolidation among grocers since the late 1980s gave Wal-Mart
an incentive to break into the sector. With less competition, the
price of food sold at supermarkets nationwide grew at twice the
rate of the producer-price index from 1991 through 2001, fattening
profits. That meant Wal-Mart could come in, cut prices ten percent
to 15% and still make a profit.
As with its other merchandise, Wal-Mart is aggressive on cutting
costs. To simplify inventory, suppliers are being asked to pack
fresh chicken trays in uniform weights to make it easier for the
store to restock and price the poultry. A machine, rather than a
person, fries and flips doughnuts. Produce is stacked in reusable
plastic containers to cut labor costs. Meanwhile, a central office
at Wal-Mart's Arkansas headquarters monitors the stores' heating
and cooling systems and refrigerated cases to control utility bills.
Studies show that items at Wal-Mart cost eight percent to 27% less
than at Kroger, Albertsons or Safeway, including discounts from
these competitors' loyalty cards and specials.
Customers are responding. Nancy Short, a receptionist at a Houston
pediatric office, had shopped at the Houston Randalls, recently
purchased by Safeway, until the Wal-Mart opened near her office
last year. She found the variety and quality of produce similar
to Randalls, she says, while favorite items like a Kraft Monterrey
Jack cheese log and Frito-Lay Wow potato chips were half the price.
Wal-Mart customers do give up selection for convenience and low
prices. At its Neighborhood Market stores, half the cash registers
are self-service, potentially speeding checkout, and photo processing
takes just half an hour. But the markets, as well as the supercenters,
offer fewer choices. In barbecue-crazy Memphis, a Kroger store offered
13 types of locally made barbecue sauces, while the Wal-Mart supercenter
had three. Meanwhile, some grocery chains offer customers more amenities,
such as FTD-certified florists, custom-cut meats or a Starbucks
in the store.
In response to the growing competition, Kroger lowered prices last
year across the country, becoming the first of the large conventional
chains to do so. It vowed to shave more than $500 million in costs
by the end of its fiscal year on January 31, 2004. The company also
cut 1,500 management and support-staff jobs and consolidated divisions.
Kroger, Albertsons and Safeway also have expanded their house-brand
products, which tend to be at least ten percent more profitable
than outsiders' major brands and can build loyalty among customers.
About 24% of Kroger's total grocery sales come from its house brands;
41 company-owned manufacturing plants produce 7,500 Kroger products.
But that strategy can sometimes backfire: When Safeway dropped
Boar's Head delicatessen meats for its own brand, customers complained.
All three chains are trying to capitalize on Wal-Mart's biggest
weakness: meat. Three years ago, Wal-Mart reassigned its butchers
to other jobs after a group of meat-cutters in east Texas voted
to unionize. Wal-Mart turned to case-ready meat, packaged by the
supplier. The decision left its meat counters with fewer choices
and no customer service.
By contrast, a butcher at Kroger can custom-cut pork crown roasts
for customers. Some Safeway stores offer prepackaged flank steak
rolled around feta cheese and spinach. At an Albertsons, seasoned
salmon filet with pesto butter costs the same as regular salmon
filet: $4.99 a pound.
Still, labor costs put traditional grocers at a disadvantage. Labor,
mostly unionized, makes up about 70% of a traditional grocer's overhead.
Not one of Wal-Mart's more than one million U.S. employees belongs
to a union. Some analysts say Wal-Mart pays about 20% less in labor
costs, with most of these savings coming from more flexible work
rules for its employees.
Wal-Mart says it offers competitive wages and benefits.
Wal-Mart still has problems to solve. With 100,000 people visiting
an average supercenter each week, the stores' displays get messy
and dirty quickly; aisles are jammed with new stock waiting to be
shelved. Neatness is one quality in which Kroger and other competitors
aim to outdo Wal-Mart.
Kristy Reece, a 25-year-old Houston microbiologist, shops at Kroger
and says the Wal-Mart up the street doesn't appeal to her. "I'm
the kind of person that'll pay more for organization and cleanliness,"
she says.
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