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COVER STORY: 71st Annual Report of the Grocery Industry: The search for growth

As supermarket operators ease into 2004, many are feeling more optimistic than in recent years past. Their outlook on the nation's economic health is brighter than it was at the beginning of 2003, and they see the profitability of their businesses as improving -- most likely because of cost-cutting efforts that they're making now.

Supermarket sales last year edged up to $432.8 billion. That modest 2.6 percent increase from 2002 is the lowest gain since 1992 and 1993, when the country was recovering from another recession. The industry hopes the current slight increase reflects the better future that lay ahead at that time.

Still, regardless of how much the economy picks up and how tightly retailers can tweak their operations, supermarkets across the country continue on a relentless search for growth. From large chain operators such as Albertsons and Delhaize America -- which are turning to new formats and improved customer service, among other strategies -- to the smallest independents focusing on product assortment, ethnic marketing, or more efficient technology, the goal remains the same: to grow the business in a retailing age that includes the likes of dollar stores, specialty food shops, convenience stores -- and, of course, supercenters, namely Wal-Mart.

For some the search for growth has become more of a search for survival, especially for those stores competing with Wal-Mart's supercenters. While the industry has been observing the Bentonville, Ark. retailer's moves for a decade or more, the threat is now meeting many face to face for the first time. In 2003 alone, Wal-Mart rolled out some 200 supercenters, many of which replaced its regular discount store format. Early this year the company opened its first California supercenter, marking the format's entry into the country's most populous state. By 2007 the number of Wal-Mart supercenters nationwide could reach 2,000. That growth would give the retailing giant control of about 35 percent of food store industry sales, according to Columbus, Ohio-based consulting and market research firm Retail Forward.

The supercenter threat from other retailers isn't quite as serious, although every store is nibbling away at traditional supermarket sales. According to ACNielsen's latest channel blurring study, supercenters -- comprising Kmart, Target, and Wal-Mart -- are now shopped by 54 percent of households. Penetration growth within this channel was affected as Kmart closed 12 supercenters in 2002, and 57 in 2003.

Not surprisingly, retailers polled for this year's Annual Report view Wal-Mart as a major problem for their operations, just behind rising health insurance costs. As one retailer noted: "Wal-Mart is killing us. We feel that retailers will be forced to change or forced out."

Indeed, retailers must re-evaluate store formats and merchandising strategies to keep ahead of -- or, in some cases, keep up with -- the competition. Boise, Idaho-based Albertsons, for example, is forming a new division to develop new formats and manage its large-store construction and remodel programs. One of its new formats is a small discount grocery store designed to better compete against Wal-Mart and other low-cost rivals, such as Food 4 Less. C.e.o. Larry Johnston has said he envisions the store coexisting with traditional Albertsons grocery stores in the same markets.

Better values

Albertsons isn't the only retailer that sees value in offering consumers better values. Annual Report respondents view dollar stores as the second most promising food retailing format, following supercenters. Considering that the fastest-growing customer base is made up of households that earn $25,000 or less, they may be on to something. Same-store sales at dollar stores rose 6.3 percent in 2002, according to Retail Forward. That growth rate easily outpaced supermarkets and other formats.

Although most supermarkets can't afford to cut their current prices by much more, many are testing dollar aisles in their stores, and that trend will likely continue this year. Kroger Co. has begun testing 500-square-foot Kroger Dollar Store sections inside two of its stores in Houston. The sections have separate signage and entrances, and offer up to 15,000 items -- including food, clothing, greeting cards, and party supplies -- priced at $1. Meanwhile Stop & Shop has introduced a "dollar zone" -- about half an aisle devoted to $1 items -- at one of its superstores in the Northeast. Wal-Mart and Target are also testing dollar store sections in some of their larger stores. Associated Wholesale Grocers of Kansas City, Mo. is going another route by rolling out a dollar food line to supplement a GM/HBC dollar program for its independent grocers.

Burt Flickinger III, managing director of the Strategic Resource Group, points to a hybrid format that the three founders of Pathmark pioneered, which includes deep-discount grocery aisles featuring limited brands and sizes, along with a fresh department and pharmacy. The average 50,000- to 60,000-square-foot format, being revived by Pathmark in urban areas, works nicely in places that can't accommodate larger stores.

On the opposite end of the spectrum, retailers recognize the promise of upscale and specialty food stores to reach more affluent consumers. Their rating of this format moved up 11.7 points vs. last year.

One of the most successful examples is Whole Foods, known for its savvy merchandising and its niche in organic offerings. Mainstream retailers are taking note. Kroger has debuted its Fresh Fare concept, emphasizing gourmet to-go items, organics, and high-quality produce and meat. Meanwhile Indianapolis-based Marsh Supermarkets, Inc. is drawing in shoppers with its new 66,000-square-foot lifestyle market, which features a sushi bar, European pastry shop, international food bar, and Ticketmaster counter. Chairman and c.e.o. Don E. Marsh has said the company's vision for the future is reflected in these stores.

Salisbury, N.C.-based Delhaize America is rethinking its Kash n' Karry banner in Florida with a new name, Sweetbay Supermarkets, as well as a fresh focus on perishables, natural and organic foods, locally popular products, and ethnic items.

Limited-assortment stores such as Trader Joe's continue to win shoppers with exceptional private label offerings and convenient take-home meal solutions. The company was one that attracted new customers during the grocery strike in Southern California.

At the same time, some chains are incorporating more general merchandise in their product mix, Flickinger says. Pathmark and ShopRite on the East Coast are moving to a stronger general merchandise position, while H-E-B is adding items such as toys, smaller electronics, and basic apparel.

Convenience stores, meanwhile, are under heavy pressure due largely to mass merchandisers and grocers that have added gasoline pumps to their sites. A growing number of supermarkets, Publix and Giant Eagle among them, are trying out their own c-store formats.


It's no surprise that the cost of employee benefits tops this year's operational forecast, in light of the California grocery workers' strike and lockout that began in October 2003 and turned out to be the largest supermarket strike in the industry's history. Even though the labor dispute involving Safeway, Kroger, and Albertsons is now settled, other contract talks are set to take place across the country this year. Employee benefits will continue to be a major issue on which retailers and their union employees have trouble reaching a compromise.

Despite the dilemma of increasingly expensive benefits, however, retailers recognize the importance of finding good labor. They expect the costs of both benefits and wages to increase significantly in the year ahead, so it will be even more important to find top talent that's truly worth the investment.


Many of the merchandising trends retailers plan to stress this year are a direct reflection of the hottest consumer trends. Low-carb foods are considered a sure bet, followed by perishables and private label. Premium private label moved up from last year, indicating that retailers are getting more creative in their offerings as they continue to benefit from the pricing flexibility and higher gross margins that resulted from using their own brands.

Organics and natural foods continue to win praise from retailers as they recognize these products' growing mainstream appeal. Following close behind on the list of merchandising trends is an emphasis on ethnic foods, although it remains to be seen how much commitment traditional supermarkets are willing to invest in providing authentic items.

Ready-to-eat meals are also poised to grow more this year, and with good reason: Consumers are busier than ever. Supermarkets will need to zero in on tasty, healthy solutions to win back customers from the restaurant industry, since food away from home now enjoys almost half of all food sales. Sales among segments of the restaurant industry increased at a rate double that of supermarkets.

Interestingly, the use of hotter specials as a merchandising trend declined by about five points, after retailers realized that it's awfully hard to compete on price, especially against Wal-Mart and other low-price operators. Another trend that dropped was the use of frequent shopper programs. Some retailers aren't seeing the payoff of loyalty cards, but that's likely because many of them aren't capitalizing on data-mining applications. Independents and regional chains such as Wegmans have invested more time and energy, and are thus reaping some rewards, according to Flickinger. However, too many chains really aren't in touch with their top-spending customers.

Consumer concerns

No one would argue that the low-carb craze is here -- but whether it signals a permanent presence in food retailing remains to be seen. When asked to rate consumer concerns, supermarket executives voted low-carb diets No. 1, and several noted that the Atkins diet had a significant effect on their product mix, not to mention sales, last year. Meat and seafood saw big gains, while sales for potatoes, baked goods, fruit drinks, chips, cookies, and pasta were all down.

Obesity, considered the second-biggest trend, is more likely to make a long-term impact on the industry. A recent report released by the U.S. Centers for Disease Control and Prevention said obesity may replace smoking as the No. 1 cause of preventable death in the United States. Some retailers have begun addressing the issue by offering dietitian services or obesity screenings, and many are touting healthy eating on their Web sites and in promotional materials.

Food safety also tops the list of consumer concerns, and did so even before the first case of mad cow disease surfaced in this country. Luckily for retailers, consumers didn't overreact to the news, although beef prices were affected and the government promised to punch up security measures. An outbreak of hepatitis A in green onions used at suburban restaurant chains in several areas of the country also made big news last year, but most supermarkets continued to sell them with no significant decline in sales. Bird flu and other diseases continue to keep food safety on consumers' minds.

Bioterrorism was No. 6 on the consumer concerns list, although retailers themselves didn't seem to be as concerned in 2003 as they were the year before, when the events of Sept. 11 were still fresh in their minds. Still, no one would argue that food safety and security will continue to be top priorities among the industry and in the government in this new age of food retailing.
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