Wednesday, June 06, 2007

Wall Street Journal Story

Not Copying Wal-Mart
Pays Off for Grocers

Catering to Customer Tastes,
Stressing Less Hectic Stores
Help Supermarkets Recover
wsj June 6, 2007

After years of decline brought on by fighting Wal-Mart Stores Inc. on price, the nation's grocery chains are on the mend.

The supermarkets are winning back shoppers by sharpening their differences with Wal-Mart's price-obsessed supercenters, stressing less-hectic stores with exotic or difficult-to-match products and greater convenience. Last year, sales at supermarkets open at least a year rose 4%, the biggest increase in five years, according to retail consultants TNS Retail Forward. While the gains are still modest, the supermarkets got more good news last week when Wal-Mart announced it would cut back on new supercenter openings for the next several years.

Earlier this decade, the hidebound supermarket business was expected to fall before Wal-Mart's aggressive supercenter rollout and the rise of membership clubs like Costco Wholesale Corp. and high-end specialty chains like Whole Foods Market Inc. Many chains did collapse -- 26 filed for bankruptcy earlier this decade, unable to match the falling prices of their better-run rivals -- and a wave of consolidation swept the business. But the survivors rallied by redesigning stores, introducing a more relaxed shopping experience and marrying low-priced staples with higher-margin breads, meats and wine. Now, the stronger chains like Kroger Co. and SuperValu Inc. are taking market share from weaker, often regional, grocers.


Supermarkets have begun to attract new investment from those sensing a sustainable edge. Hedge fund Cerberus Capital Management LP recently joined two retailers in acquiring Albertson's Inc., a Boise, Idaho, chain, and Britain's Tesco PLC is expected to begin rolling out 100 U.S. stores in the Southwest later this year. Great Atlantic & Pacific Tea Co., once a symbol of the big chains' decline, recently acquired rival Pathmark Stores Inc. for $700 million.

Scott Frondorf, a 44-year-old Green Township, Ohio, software executive, and his wife now do more of their food shopping at a local Kroger store that offers expanded produce and "boutique-like" seafood, cheese and wine. The couple still shops occasionally at a huge warehouse market, but "momentum is definitely in the Kroger direction," says Mr. Frondorf.

Many of the chains are still learning to sidestep Wal-Mart. They are cutting back on drugs and health and beauty products, which are Wal-Mart strengths, to stress fresh produce, higher-quality meat and easy-to-prepare foods. Subdued lighting and high-end selections buttress the nonsupercenter experience. Instead of the rows of aisles with commonplace brands, the supermarkets are adding tables providing ingredients for planned meals, luring the kind of customer who shops for dinner instead of stocking up on groceries once a week, says Paul Weitzel, managing partner at grocery consultants Willard Bishop LLC. Mr. Frondorf says he was pleasantly surprised recently to find Kroger carried the walnut oil he needed for a gourmet recipe.

Safeway Inc. has converted about half of its 1,755 stores into "Lifestyle" markets with wood floors, on-site bakeries and high-end private-label brands. The third largest food retailer after Wal-Mart and Kroger, it expects to convert all its stores by 2009.

Safeway has also invested in precise temperature controls for its produce and other perishable foods as they move from suppliers to stores. And it strives to find food its competitors don't offer, says Steven A. Burd, Safeway's chairman. For instance, it worked with growers to get individual-sized watermelons two years before others. It also works with a single meat supplier to offer its own brand of tenderness-tested beef. The business picked up, says Mr. Burd, when "we started behaving more like a consumer packaged-goods company."

Supermarkets "have come to the understanding they can't put cookie-cutter stores out there anymore," says Sandra J. Skrovan, a senior vice president at TNS Retail Forward.

Safeway offers prepared foods.

Kroger has an outlet for every consumer: urban no-frills stores that stock a limited set of groceries at ultra-low prices; conventional supermarkets and larger stores with housewares; and stores aimed at upper-crust shoppers that offer more produce and prepared foods.

David B. Dillon, Kroger's chief executive, estimates the Cincinnati-based chain gained share last year in 26 of the 32 areas where it competes against Wal-Mart supercenters. "They continue to grow, continue to build, continue to have impact in the market. But in the face of that, so do we," Mr. Dillon told analysts recently.

Becoming more competitive on price has meant skimpier margins. Kroger's gross margin, or profit after product costs, slumped to 24.5% at the end of last year from 27.7% at the end of fiscal 2001. Safeway's gross margin was 28.8% last year, down from 31.1% in 2002.

Wal-Mart hasn't lost its zeal for the food business. It opened 276 supercenters in the U.S. last year, helping boost its share of the U.S. grocery business by one percentage point, to 15.3% (19% including its Sam's Club wholesale unit), according to a JP Morgan estimate.

Wal-Mart plans to build about 200 new supercenters this year. Neil Currie, a retail analyst at UBS Securities LLC, says the new stores will add significantly to the square footage Wal-Mart devotes to food. "The Wal-Mart issue isn't going away," he says.

But Wal-Mart is no longer viewed as invincible. The company doesn't provide details of comparable-store food sales other than to say that such sales rose "in the mid-single digits" in the first quarter. Overall, same-store sales were up just 0.7% for the fiscal first quarter ended April 30.

Several years ago, Wal-Mart began experimenting with a smaller format store to penetrate urban markets. But these Neighborhood Market stores have struggled with tepid returns, according to analysts. Wal-Mart opened just 12 last year, down from 21 in 2005. "We're very satisfied with the performance of Neighborhood Markets," Eduardo Castro-Wright, head of Wal-Mart's U.S. stores division, said after the annual meeting last week. (Mr. Castro-Wright is a board member of Dow Jones & Co., publisher of The Wall Street Journal.)

Burt P. Flickinger III, a retail consultant, says Wal-Mart's price advantage has narrowed in the past few years as supermarkets have cut their prices and shoppers have discovered they can save money by cherry-picking supermarkets' weekly specials and lower-priced staples. At the same time, a corporate decision to reduce inventories means Wal-Mart has more trouble keeping shelves stocked, he says. A Wal-Mart spokeswoman responds that she is "not aware of any particular out-of-stock issues" in the company's grocery stores.

In Houston, Dave Baldwin says that too often the Wal-Mart supercenter near his house is out of favorite brands like Scope mouthwash and Lever body wash. "Try to find a light blue-cheese salad dressing; it isn't there. Go to Kroger, and it's all over the place," says Mr. Baldwin. He adds that the frustration of finding out-of-stock shelves has him buying more at Kroger and Walgreen's.

-- David Kesmodel contributed to this article.

Copyright © 2007 Dow Jones & Company, Inc. All Rights Reserved


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