E-mail this article to
yourself or a friend.
Enter address:


Wal-Mart tops grocery list with its supercenter format

(Tuesday, May 27, 2003 -- CropChoice news) --

By Patricia Callahan and Ann Zimmerman, 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 10%. 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, Ark., 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 10 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, Calif., 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 10% 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 8% 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 Jan. 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 10% 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.