The Grocery Superhighway

Grocers develop sophisticated private label programs, EDLP hits its stride and natural foods aim for the mainstream, while Walmart's aspiration for food retailing domination comes plainly into view.

Picking up where our August issue left off, PG continues its look at the 1990s, which was a pivotal decade for the retail grocery industry …

Struggling through a sluggish economy in the early 1990s, more grocers turned to everyday low pricing, an emphasis on perishables and more theatrical merchandising schemes, while private label programs migrated to the next level with more sophisticated platforms led by dedicated sourcing teams, proving that this strategy had more staying power than no-brand generics a decade earlier.

A Progressive Grocer article published in 1990 noted, "Retailers are supporting private label because they're getting both better-quality product and more cooperation from manufacturers." Companies began using store brands to differentiate themselves from their competitors and to fill product niches.

One regional grocer, Shaw's, rolled out a private label program that it developed from scratch. The company said it planned to have 1,000 private label products, including poultry, by spring 1991. Hannaford, another regional player, reported that private label now accounted for more than 20 percent of grocery, frozen and dairy sales, up from 12 percent in 1989.

Inside their operations, grocers increasingly turned to technology to tackle expenses, including rising energy costs. For instance, Big V Supermarkets trimmed its electrical costs by 29 percent compared with other chains' average costs, thanks to a computerized energy management system. In another example, one of Safeway's stores in California realized a 25 percent energy savings by using a state-of-the-art refrigeration system.

On the labor front, Hannaford made good use of a 10-year-old labor scheduling program called Management Planning, and even managed to avoid some otherwise necessary layoffs.

By spring 1991, the industry's mood was improving. The Gulf War ended, oil prices eased and the economy was looking much brighter.

Yet PG's 1992 Annual Report found that in 1991, overall grocery sales inched up by just 2.1 percent to $376 billion — the lowest rate of increase in more than 20 years.

The Faces of Change

While Walmart was increasingly making its presence known, wholesale clubs were considered one of the most threatening competitors in the first half of the decade. Walmart had a piece in that business, too, as it acquired Wholesale Club Inc., increasing its Sam's Club chain to 168 stores and propelling its sales past Price Club (with plans to convert 27 Wholesale Clubs into Sam's Club locations). A&P, meanwhile, purchased 50 percent of Chicago-based Warehouse Club Inc.

Meijer, a truly successful supercenter operator, formed a warehouse club division called SourceClub. This division operated independently from Meijer's super combo stores.

By 1992, the growth of clubs, deep discounters and mass merchandisers was more than double that of supermarkets. Club stores, by themselves, were thought to be taking in as much as $15 billion in food sales each year. The growing power of this format was even shifting the merchandising formula in supermarkets. Club packs were expected to receive almost as much attention as perishables in 1992, according to execs surveyed by PG.

Food Lion, a conventional operator overseen by leadership from Brussels-based Delhaize, was another notable competitor in the early '90s. In 1990 alone, the company opened 20 new stores. It was also entering new markets, including Kentucky and later Dallas/Fort Worth.

In 1990,PG noted, "In an age of big supermarkets with a wide product mix, Food Lion continues to rack up impressive gains with small, cookie-cutter stores." Keys to its success included a "disciplined, consistent, centralized operation."

At the end of 1992, however, Food Lion's reputation was dealt a severe blow when an ABC "Primetime Live" special accused the retailer of improperly handling perishables. That negative media attention, widely believed to be concocted by disgruntled union employees, hurt not only Food Lion, but also other retailers trying to earn consumers' trust in a renewed era of food safety awareness.

Also in 1992, the $1.1 billion merger of Supervalu and Wetterau restored Supervalu to the No. 1 wholesaler position, giving Supervalu its popular Save-A-Lot limited-assortment format, which, along with Aldi, was considered to be the only successful format of that kind in the country.

Unfortunately for the industry, outside competition and minimal inflation combined to provide supermarket sales with their worst growth rate ever in 1992. Overall grocery sales reached $382.6 billion, with sales specifically at supermarkets coming in at $286.3 billion.

ECR Comes of Age

Faced with such sluggish growth, retailers strove to reach a turning point in the decade. One glimmer of hope came in the form of a pervasive acronym that galvanized the industry: ECR (efficient consumer response).

Officially launched in 1993 when the Kurt Salmon study Efficient Consumer Response was unveiled at Food Marketing Institute's (FMI) Midwinter Executive Conference, ECR's central premise revolved around the supermarket industry's competitiveness, which was predicated more on its own inefficiencies than on inequities in supplier deals. An industrywide ECR initiative, led by FMI and the Grocery Manufacturers of America (GMA, now Grocery Manufacturers Association), aimed to identify how companies could operate more efficiently and deliver more value to consumers.

In hindsight, it seems that ECR primarily benefited the largest chains and suppliers, but did little to achieve overall industry growth. By 1994, grocery stores posted an "anemic" gain of 1.9 percent, to reach $390 billion in sales. In addition, independents now accounted for less than 28 percent of supermarket sales, and the total number of supermarkets was down, to 29,800.

The second half of the decade brought about progress in the form of the dot-com boom, but for traditional grocers, growth was an uphill battle.

Still, some regional grocers introduced their own forms of innovation, which helped the industry realize that Walmart wasn't the be-all, end-all force in grocery retailing.

Shopper loyalty cards began making their way onto the scene in a big way at a number of retailers, including Marsh Supermarkets, which in 1995 rolled out the Marsh Fresh Idea card that allowed customers to take advantage of electronically applied instant discounts. That same year, Marsh Fresh Express introduced home grocery delivery in Indianapolis and became the first local supermarket chain to offer telephone and online home grocery shopping.

Regional innovation also surfaced in Pathmark's "2000 format," which placed its emphasis on perishables, one-stop shopping and service. Meanwhile, in the hotter-than-ever technology sector, Vons, A&P, Schnuck Markets and Ralphs were cited as being among the leaders in electronic marketing.

Nature Calls

While grocers were finding areas of growth, they had new, nontraditional competitors to keep an eye on: natural food stores. The largest of these was Whole Foods Market, by this time a publicly traded company with plans to be a 100-store chain by 2000. Another popular retailer in the niche organic and natural channel was Fresh Fields, based in Rockville, Md., followed by two smaller chains that ended up merging, Wild Oats Market and Alfalfa's Markets. (Whole Foods acquired Fresh Fields in 1996, and would go on to purchase Wild Oats in the following decade.)

With health and wellness gaining in popularity, the produce sector made notable progress in the late '90s, and grocers welcomed an influx of prepackaged salads, specialty produce, branded items and organics to help boost sales. In addition, the appeal of local produce reached an all-time high in PG's 1997 Produce Operations Report: For the first time, 100 percent of retailers surveyed said they were carrying local produce.

In the meat department, value-added meats grew at a much slower pace, but they helped grocers beef up an otherwise declining department. Supermarket floral programs also blossomed to new heights for many retailers during the decade, while store-made bagels imparted a much-needed new stream of dough to the bakery department's bottom line.

Health and beauty sales suffered during the decade, as drug stores and mass merchandisers cut into grocers' business. Grocers' defense moves included trying special end caps, selling a few top-moving HBA items at a loss to recapture business and, in Publix's case, moving to EDLP in health and beauty.

Perhaps as a result of conventional grocers' struggles, merger activity in the food industry roared ahead by 36.4 percent in 1997, reaching a record 724 deals, according to the Food Institute. There were 25 mergers among supermarkets (see sidebar at left for more on mergers and acquisitions during the second half of the 1990s).

The merger frenzy just kept on going, and by the end of 1998, Albertsons, Safeway and Kroger were the three leading grocery chains.

PG's 1999 Annual Report found that fewer chain, independent, wholesale and manufacturer execs were optimistic about the growth of the U.S. economy, price stability of food, or grocery store profits. Yet 1998 showed some resilience. Supermarket sales, despite lack of inflation, increased a healthy 3.5 percent to $472 billion — a figure bolstered by retailers' increased attention to perimeter departments.

By 1999, the top five companies in the business had a lock on an estimated 29 percent of all U.S. supermarket sales. But Walmart, which debuted its standalone supermarket concept Neighborhood Market in 1998, wasn't far behind.

Signs of the Times

1996: Wild Oats and Alfalfa's merge and file an IPO; Whole Foods buys Fresh Fields.

The FDA approves Olestra, the first fat substitute, for use in snack foods such as chips and crackers.

Ahold acquires Stop & Shop.

President Bill Clinton creates a $43 million early-warning system for foodborne illness sponsored by USDA, FDA and Centers for Disease Control.

1997: FMI claims a victory in its fight against the "death tax," when Congress approves a $94 billion tax cut including repeal of the tax. Although President Clinton vetoes the measure, this action begins a campaign that leads to repeal in 2001 as part of President Bush's major tax-cut plan.

Just a year after Byerly's announces it will offer home delivery and online shopping, the company suspends the service. The retailer's decision is based on logistics: While consumer demand is there, the logistics company it partnered with has "changed course."

Safeway acquires Vons.

Fred Meyer purchases Smith's Food & Drug and reaches an agreement to buy Ralphs Grocery Co. and Quality Food Centers (QFC).

1998: Irradiation of meat is approved by the FDA.

The Kroger Co., already the largest grocery retailer, merges with Fred Meyer to form a multiregional supermarket operator with combined sales accounting for 10.4 percent of total grocery store sales.

Walmart opens its first Neighborhood Market in Bentonville, Ark., combining a conventional supermarket with a drive-through pharmacy.

1999: In an $11.7 billion deal, Albertsons acquires Salt Lake City-based American Stores, operator of 228 combination stores, 514 supermarkets and 783 stand-alone drug stores.

Shaw's acquires Star Market.