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INDEPENDENTS REPORT: Limited but not constrained

Battling increased competition, low inflation, and limited population growth, supermarket retailers across the country -- and especially those operating in the economically challenged Midwest -- are coming to a cold, hard conclusion: Reducing operating costs may be their only hope for survival.

As a result limited-assortment stores, which offer consumers a no-frills, low-price alternative to the conventional supermarket, are becoming more popular as an alternative for the independent sector.

During the past five years, limited-assortment stores have become one of the fastest-growing formats in the industry, with the total number of locations growing at a rate of nearly three times that of conventional stores.

Accounting for nearly $20 billion of the food industry's approximately $430 billion in annual sales, the number of limited-assortment stores operating in the United States alone has, according to PG research, increased to a total of 3,326 in 2004, from 2,950 locations in 2003.

More flexibility

Supervalu continues to earn high marks from independents with its money-making Save-A-Lot program, and growth for the German-owned Aldi is accelerating both in the United States and abroad, but the industry's limited-assortment leaders should also be keeping a more watchful eye on a concept introduced by Roundy's over a decade ago. Its name? Mor For Less.

Operating 30-plus stores in Indiana, West Virginia, Ohio, Kentucky, and Pennsylvania, and soon to be in Michigan, Mor For Less was established in the early '90s by Roundy's Eldorado/Evansville division in Indiana, which has since migrated east to Lima, Ohio and is now operating as Roundy's Ohio Division.

Offering customers nearly 75 percent of the products used in their kitchens, the Mor For Less format mirrors both Save-A-Lot and Aldi in size, occupying approximately 15,000 square feet. Also similar is the banner's main customer base, of which an estimated 44 percent are blue-collar, lower-middle income families.

Independent Mor For Less operators, such as Barry McGinnis of Franklin, Pa., are convinced that the trade-offs of frills, fancy interiors, and variety, in exchange for lower prices, a smaller capital investment, and simplicity, provide plenty of headroom for growth, despite the ongoing pressure from other price competitors.

"Overall we invest an average of $500,000 to $750,000 to open a limited-assortment store, which is considerably less than it takes to open a conventional format," says McGinnis. "Our stores are located both in freestanding buildings and in strip centers, with our average rent factor being anywhere from $2.50 to $3.50 per square foot. That sets the stage for being able to offer a clean, customer-friendly environment that provides an extensive mix of key national brands and an overall savings to the customer of 35 percent to 40 percent."

While its counterparts, Save-A-Lot and Aldi, also offer similar appeal to operators, Mor For Less also has important distinctions. For example, Save-A-Lot and Aldi offer customers limited national brand products and require owners and managers to follow strict operating guidelines. Mor For Less, in contrast, appears to be a more flexible, independent-friendly concept.

McGinnis, a 31-year veteran of the food industry, appreciates that flexibility. "We have the ability to meet the local needs of each individual community in which we operate," says McGinnis. "For example, we operate deli departments in all of our stores because customers want them, and last year we piloted an in-store bakery program at our Clarion location. The bakery project has been very successful."

He adds: "Perishables have always been a big emphasis at our seven stores, and they help to drive our business. In addition to our delis, we carry a wide variety of fresh-cut meats, as well as outstanding produce."

Focusing on perishables, offering key national brands, and even launching a pharmacy program in one location last year all make McGinnis' version of the Mor For Less format sound pretty conventional. However, he emphasizes, many essential limited-assortment practices are integrated into his operation.

Local hybrids

"Due to inventory constraints, we don't carry cigarettes, and because of state regulations we carry no beer and wine products," he explains. "Like other limited-assortment formats, we gain efficiencies at the back door. Our deliveries are minimal and we receive from Roundy's two to three trucks per week per store, with each truck hauling 22 to 24 pallets per delivery. Operating hours are on average 8 a.m. to 9 p.m. daily; our customer counts range from 4,000 to 5,000 per week per store, and we stock approximately 4,500 items per store. We're definitely limited assortment."

The flexibility of Roundy's concept, however, allows Mor For Less to become more of a hybrid that can be tailored by locality. "Because we have more flexibility with our program, I believe we're better able to meet the needs of local markets. In so doing, we deal with a number of DSD vendors. While our heaviest purchase concentration is from our warehouse, we probably purchase from 75 percent of the total vendors available in our market. Again, our focus is to offer the lowest possible prices while catering to all of our customers' needs."

Changing the game

McGinnis considers his most valuable asset to be his Mor For Less associates. "We employ anywhere from 25 to 40 associates at each store, and our management structure consists of store managers, assistant managers, office managers, and departmental managers. We hire motivated and reliable people who are eager to learn and grow with our company. For us, people and flexibility are crucial."

But the Mor For Less format is not immune to all the challenges faced by other limited-assortment operations, or conventional stores, for that matter. "Our successes vary with each store location, due to our assertive posture within each arena," admits McGinnis. "Like most grocers today, our greatest challenge is keeping our costs in line. But I believe we're more insulated from big competitors, because even supercenters have a hard time competing with our price structure and low overhead."

While industry experts stress that limited-assortment operators must follow rigid programs set forth by their wholesaler to be successful, it appears that Roundy's is changing the game somewhat by placing more trust in its storeowners, who are viewed by the wholesaler as "true entrepreneurs."

It's my guess that striking a balance between following the rules -- and exerting one's independence -- will be key to this concept worth watching.

Independent Retailing editor Jane Olszeski Tortola can be reached at [email protected].
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